E213: Unveiling the Secrets of Main Street M&A: Insider Tips from M&A Veteran Carl Allen

[00:00:00] David Green: Good morning. Good afternoon. It could be evening, depending on where you're listening to this from. This is the Ronald Skelton, How2Exit podcast. Today is guest host Monday. I am that guest host, David Green. Born and bred in London, in an M& A space. This is absolutely not about me. A very warm and a very special welcome to Carl Allen. Hi Carl. 

[00:00:25] Carl Allen: Good to, good to be here. Nice to meet you.

[00:00:27] David Green: Yeah, lovely to meet you. So we can confirm we've actually never met, never spoken.This is our entry into each other's world.

[00:00:35] Carl Allen: It is, yeah.

[00:00:36] David Green: So firstly, just thank you, a really big thank you for agreeing to do this. The speed in which Ronald rang me back, we were on the phone one Saturday morning, or Saturday afternoon for me.

We'll do very early in the morning for him. When we were talking about us having this podcast, I said, well, just ask Ronald. Cause when I go up and talk on stage, I don't script anything. I just go up and chat. No slides. Brilliant. And I said, just ask him. I like to kind of exist that way with someone really congruent and really real.

Just let the conversation flow. And he literally rang me back in 60 seconds. He said, I thought that was quick. Phone went, said, Carl said, love it. So thank you for that. And thank you for being so kind of, I guess that probably epitomizes you, does it, Carl? That you just like to be there and present with people.

[00:01:22] Carl Allen: Yeah, yeah. And I'm just, I'm the kind of guy that just loves giving back and sharing my stories and helping people. So, uh, yeah. 

[00:01:29] David Green: Well, if anyone had any doubts, because you could probably appreciate. You'd probably take your career to a level where many people that are several zeros or several deals behind you might think, well, I'm never going to get into a room and speak to someone like him. But let me tell you, anyone who listens to this, he just couldn't wait to say yes, and we're very grateful for that.

I guess one of the things would be really cool for me to understand is, bit of background about you. How did it start? Cause I'm guessing you didn't go, I'm going to be in M& A. There would have been a pivot. So perhaps talk about the early stages of your career and then that, what that pivot felt like and how did that penny drop?

[00:02:09] Carl Allen: It, it's interesting. So I'm actually in year 32 now of mergers and acquisitions, so I'm 53 now. I started my m and a career when I was 21. So, so I always wanted to be a structural engineer. So I was also fascinated by buildings. So I, my degree, my first degree was in civil and structural engineering.

And I graduated first class honors degree from the University of Leeds. Top of my class. Was national graduate of the year. And I went to work for a very prestigious engineering company. And I was, this was 1992. I was earning 11, 200 pounds a year, right? The number one graduate in the world or in country, I was on 11 grand a year. And I was broke, right?

Absolutely broke. And my buddy from university who was pretty dumb, he got a job with Bank of America in London as a trainee investment banker. And he was on about 40, 000 pounds a year. And I thought that's not fair. I went down this year, one weekend in London and we're having beers in common garden and we're in this bar and his boss was there. And I'm complaining like crazy. Like, I'm so much smarter than him. How on earth can he earn four times the money? And his boss turned around to me and said, well, put your money where your mouth is, uh, can work for me. You start on Monday. So I just thought, okay.

So I called my parents and I'm like, Hey, I'm walking away from this structural engineering career and all these awards.I'm going to go and chase the Yankee dollar. I'm going to go work in London as a, as a trainee investment banker. So I did, right. And it was an absolute basking of fire.

Have you ever seen like the movie GI Jane, where it's about training Navy SEALs? It's kind of that dynamic, right? They hire a couple hundred people and they tell you, yeah, only 10 percent of you are going to survive,

[00:03:57] David Green: I'm going to screw you up. Yeah. Only the fittest are going to survive here.

[00:04:03] Carl Allen: Yeah, but I survived, right? So I rotated through all the different areas of investment banking.

So equity, research, bond trading, fixed income, back office, compliance. And then I landed in, in the mergers and acquisitions team. And I had no clue what mergers and acquisitions was. And they said, well, it's like buying and selling houses but you're buying and selling businesses. And the property survey you would do when you buy a house, in a business deals called due diligence. And there's tax and legals and warranties and all these different things.

And that's what we do. We buy and sell companies for people. I thought, well, that's pretty cool. So, so I fell into that and my first deal was, was a deal between GE and Lockheed Martin over in the United States. So I'm traveling a lot. And then, as the, as the technology sector kind of really starts to pick up steam in the late nineties, I found myself more doing a lot of technology deals. So I did a lot of deals with IBM, with Microsoft, with Dell, EMC, Hewlett Packard. 

[00:05:02] David Green: But still working for this company? Still working bank? Yeah. 

[00:05:05] Carl Allen: I so I, I was, I was an M& A guy at Bank of America. So I had a lot of clients.I had a client in Germany called SAP, the big software company. But I was doing a, bought four or five businesses for IBM. Seven or eight for Cisco, Oracle, PeopleSoft did all those great deals.

And then, in 2001, um, kind of wanted a change. So I went to business school. Went to the University of Chicago. Did an MBA. And then went into private equity, worked for a corporate VC fund in Boston. We invested in a technology company, which we ended up selling to HP. And I was interim CFO of that business through the transition. And HP dragooned me into going and working for them as one of their internal M& A guys.

So it was an 80 percent pay cut. I went from earning a million dollars a year to about 200, but it was fascinating, right? Because I'd never really understood David what it was like to sit inside of a company and watch it do deals. How it integrated businesses? How it leveraged cross selling? How it looked at how deal synergies could be like materialized in a transaction?

So it was a fascinating experience for me. But then on the 1st of February 2008, my entire world changed in a day. I was in Moscow with my CEO, Mark Kurd, who's no longer with us. We were buying a printing company, from a Russian vendor. And my phone rang. I'm in a boardroom. And it was my wife on the phone.

And do you remember the old Motorola razor flip phones? So I had one of those phones. If you had it on a desk and it rang, it would vibrate and it would travel, it would move. So moving along the desk and then it fell onto the floor. And Mark had said to me, you got to answer that. And we're trying to get this deal done.

You know what it's like. So I picked up the phone with my wife. I said, Hey honey, I can't talk to you right now. I'm in the middle of this. She said, I don't care what you're doing. I've gone into labor. She was 36 weeks pregnant and gone into labor. If you don't get your ass back to England right now, you're not going to see your son.

Right? So I literally ran out of this hotel.I had my phone, my wallet and my passport with me. I ran out into the street, hailed a cab. My luggage and my computer was still there. I've never been back. My clothes are still there. I think, I don't know. I've never been back. So, managed to get back to Manchester airport, police escort all the way to the hospital, and then my son was born about 50 minutes after I got there.

So I'm cradling this little guy in my arms. He's 16 now, Josh, and he's tiny, right? Cause he's four weeks premature and he's wearing a little hat. Babies come with hats apparently. So, you know what, I can't do this anymore. So I, I retired. I was 37 years of age. I retired and I thought I'll just be a dad now.

And then after about three weeks, I got really bored. And I thought, what do I do? And my wife said, well, you know how to buy companies and sell companies. So I transitioned from billion dollar tech deals to million dollar other deals. So my first business was a transport company that I bought.And then I grew and sold that.

Then I started buying engineering companies. And I've, I probably bought a hundred businesses in the last 15, 16 years. I still own about 30 of them today. But then, about seven or eight years ago, people were just saying, Hey, you got to teach this stuff. Like you have a unique system for buying businesses, raising capital, closing deals and building relationships.

One thing that really struck me coming out of the corporate world into the main street world was, how different deals were, right? So if you're doing a billion dollar deal, it's math, it's financial engineering, right? When you're buying a 2 million pound or $2 million business, it's a lot more about seller psychology than it is about the numbers, right?

The bigger the friendship you can build with the seller, the more creative,

[00:08:53] David Green: I could talk all day on rapport building.

[00:08:56] Carl Allen: Yeah, so that kind of struck me about seven or eight years ago. Like just how important rapport is in a relationship and how it directly translates into getting really creative on a deal structure. We call this seller financing in America, deferred consideration obviously in the UK.So I ended up building a community around that. I've coached nearly 30 000 students all over the world. Massive concentration in the US.

So I have a big coaching program, mentoring program. I have a mastermind and then, and then I've created a private equity fund. Which, invests and funds my, my very best student deals. So a lot of the businesses I'm buying now, I'm not buying on my own. I'm buying with my own student partners, if you will.

[00:09:39] David Green: Yeah, I'd like to get into that. The sort of what you're looking at now, but there's a bit to unpack there, if that's okay. I mean, you're so well placed, or in terms of what people could look to in their own journey because you've had both sides of that global economy. You know that 50 percent line that say Jeremy talks about. I mean I'm sure you do too but that, the corporate which is the fun half and the world would collapse if the SMEs all decided to stop SMEing. And so you've just kind of lived both side of that fence. 

To, I'd be interested to know, first of all, what did that, how long did it take you to transition from that, this is very emotive. This is about how many zeros we can take off this page. I don't care if you,couldn't give a shit if you like me or not. We're going to see, you know, do a deal in the way you do the corporate world. How long did it take you to learn those new skills?

[00:10:28] Carl Allen: Very quickly, actually. Probably about six months and, and I learned it living through my very, very first deal. So the first business I ended up buying the original intention was not to buy it, right. I decided to become a business broker. When I retired, got bored, went back, I thought I'm going to be a business broker.

So I found a business to sell. It was a transport company. He was doing about 5 million pounds in, in revenue. About 15 percent margins. Great business in Liverpool. Went down to see them. Got a mandate to sell it, found a bunch of trade buyers and we were 24 hours from closing the deal. And it was a thursday night, as you know in England all deals close on a Friday. In America they close whenever, right.

But, it's Thursday night, it's pouring down with rain and I'm in my home office. And I'm just getting all the documents and everything together. Closing was 10 a. m. on Friday. And Collin rings me the owner of the business. He's like, hey, we're pulling the deal. I'm like no, you know I've got like a 300 000 success fee riding on this deal. I've worked on this deal for like six months.

[00:11:31] David Green: Oh, you were brokering this. You were actually brokering this.

[00:11:34] Carl Allen: I was brokering it. I was the sell side broker. And I, we, we were selling it to a 75 million pound turnover, transport company, right? So big deal. And, so I had a lot of money riding on it. So he said, look, we're pulling the deal, come down and we'll tell you.

So I got in the car, I drove down to Liverpool's like an hour. So I live up in the Lancashire. And, I went into the warehouse, so this, this company was really cool company. It did freight forwarding. It did normal transport logistics, but it had a lot of warehousing. And one of the key USPs it had was, it did a lot of work for the major, major retailer supermarkets. So it would send a truck out, they'd rip all the tills out. They'd bring them back. They'd store them in the warehouse and then they'd get paid to store them. Then they get paid to take them back to the place to repair them and all those different things.

It was great, great business. And so I went down, I'm in the warehouse and all the employees were in the warehouse and the owners are there in the middle. And they said, we're pulling the deal because the owners, that the new buyers came in today. And told us they're going to fire everybody, right? They only want our assets and they only want our customers. They're going to sell the development.

They're going to sell the land and the warehouse to a developer to build houses. They're going to get rid of all the employees and yeah, it's a great deal. You've brokered us, a great deal with a massive closing payment, but we can't retire knowing that our employees are going to be put in harm's way.

So they said, we're not selling to these guys. You need to find us. And they, they said something that I say every day. Every single day when I'm coaching people. They said, we need a safe pair of hands to take this business from us and take it to the next level. And then we want to be able to, to cheer those people on from the sidelines. And they said something that I could, my wall street brain could not comprehend.

They said to me, it's not just about the money. It's got to be the right buyer. The money is secondary. Yeah, we want some money, but it doesn't have to be anywhere near what the trade buyer was going to offer. It's got to be the right buyer. And I don't know what possessed me, David, right? I don't know what possessed me.

[00:13:43] David Green: I know what possessed you. It's you're, you're talking about my sweet spot now. So, but carry on. I love this.

[00:13:49] Carl Allen: I looked at Colin and Alan, the two brothers, and I said,I'll, I'll buy it. I'll buy the business. And they looked at each other and started laughing, right? They said, what do you mean you're going to buy the business? You don't know anything about this industry. I said, well, I've worked in this business for six months now.

I know everything about this company. And I pointed at the financial controller, the sales manager, and the ops director. And I said, I'm going to give them all 10 percent of the company. We're going to have a profit share for all the employees. I said, I think I can get you just less than half of what you're, you're looking for.

I can leverage the balance sheet. I can get a loan from the bank. I can put a little bit of my own capital in.

[00:14:31] David Green: And you were happy to do that?

[00:14:33] Carl Allen: Yeah. Cause I knew it was an incredible business, right? I knew it was a really good business. Great team. A lot of those employees have been there 10, 15, 20 years. I've said so many times through the selling process, like why on earth are you selling this business?

Like it's growing like crazy, like you're the best in the market. Can you not grow it for two more years? I could probably get you double the price, right? I wanted the fees, right? But. but they were done. They were, 

[00:14:59] David Green: Yeah, once you've checked. out, it's very difficult, isn't it?

[00:15:02] Carl Allen: They wanted to retire. One of the brothers had, had a major knee replacement.

The other one had fallen in love with a lady from Thailand and he wanted to retire and go move out there. So these guys were done, right? So I ended up buying the business. And it's funny cause I'm driving home in the car and I called my wife, Julia. And I said, she said, hey, how was it? Did you get the deal back on track?

I said I kind of did, yeah. I said, but hey I've decided to buy it. Are you crazy? I said, well, no. Anyway, so, so the following day I called my solicitor, uh, I called my bank.I had a lot of money in Barclays at the time. So, um, you know, they knew me. They gave me some cash. I did invoice discounting,on the,on the invoices. I did a sale and leaseback,

[00:15:47] David Green: Not to give them though, as you didn't get, did you give them that to it? As part of the exit?

[00:15:52] Carl Allen: Yeah. So what I did is, so we did a deal where I paid them half the money at completion. So I, um, I did a sale and lease back on some fixed assets. I let them keep the building. So I just became a tenant for the building. And I got some cash out of the, we call it accounts receivable in the U S where I'm doing all my deals now, but,you know, the debtor, but we factored that. We got some cash out and there was a load surplus cash in the bank. As you know, in England, cause the tax rules are so beneficial.

If you take the cash out when you do a share sale, you only pay the 10 percent entrepreneur's tax relief. So, so they got enough, we got enough out of the balance sheet to pay them at closing. And then we just had a little bit of a seller note and a bit of an earn out. So we did that deal. I worked in the business for about a month and then put my three people in place.

We did a bolt on acquisition. And then, about two and a half years later, we'd,we paid off all the financing. And then the three, my three 10 percent partners, they did a management buyout and they bought out my 70%. And they just refinanced that the deal, with, uh, with a big cashflow lend from Barclays.

So, so that was my, my very first deal really outside of Wall Street. And it taught me the massive lesson that, main street businesses, retiring business owners, are not as focused about the commercial terms as you think. They think about other things like the legacy that they've built and can that be protected,they massively care about their employees.

I could tell you a hundred stories of deals I've done both in the UK and in the U S where price and terms were at the bottom of a very long list. I once bought a marketing agency in LA and, she didn't care about the money at all. She had, I had to write in the contract that I wouldn't change the logo of the business.

That's what she cared about because it won an international design competition in the eighties. She said, you can't change the logo. You can't change the name. You can't fire any employees. You put that into contract. I don't care what you pay me. Okay, there you go. I'll pay you a dollar. I'll sign up for that.

So, so that, that blew my mind, right? How coming from wall street where it's all about money, to main street where it's a lot more about the intangibles. And it, that taught me as well, how to negotiate. How to ask the right questions and how to identify with the seller, what are the massive points that will make the deal work for them and make them happy. And then if you build your deal around all those non financial items, the financial piece then becomes a lot easier to negotiate. Not all the time, obviously.

[00:18:27] David Green: No, no, definitely not all the time. But, I mean, you're really hitting my sweet spot. Whenever I sort of get asked, I've been on Ron, Ronald's podcast before and others and the talks I've done at events. I've kind of centered it aroundparticularly there's a community and I'm not sure about yours.

We can talk about that, but particularly in say the Harbour Club is a lot of these deferred no money down deals. And I kind of have this theory you are making the most ridiculous suggestion. You're saying to somebody, so the very people you're describing, I've got this really great idea. You know, that thing you've had for the last 35 years where you put a roof over your family's head and fabulous holidays and fed your kids.

You're going to give it to me for nothing. And I'll pay you off over three. It's the most absurd suggestion. So how are you going to, how are you going to bridge that gap? Even if it's not no money down, even it's a really soft deal. Rapport, you've got to connect, you've got to connect with people.

And that's probably a big distinguishing factor between your two worlds you've lived in.

[00:19:23] Carl Allen: It is connection. So, so those types of deals you've just described, they work a lot better over here in the United States, which is why I moved over here. They don't work as well in the UK, although I've bought, I've not bought a business in England since COVID, but I bought five companies in 18, 19 and 20 combined that we're all what I call these annuity deals, right? 

So it's where you're, it's like lease purchasing a company. So rather than, like if you're going to buy a car, you can buy it for cash or you can buy it, you can lease it, right? You can pay for it over a period of time. So that's what we're doing with business acquisitions in America.

Not all the time. You probably have to look at 15 to 20 deals to get one that, A, hits your buy box, B's got great cashflow and C you've got that distressed seller psychology that will entertain this type of deal. So an annuity deal is really just a 10 year seller note, right? And it's not that that's important.

It's how you position it and how you sell it to the business owners. So when we're making offers on deals. And I do this in my own deals and obviously I'm teaching this to my own community, we go in with something called a two offer strategy. So what we do is we, we write an offer up, not an LOI We write an offer up to the seller and we put two offers side by side. And the reason we did this, I did a lot of Tony Robbins' work before COVID. When all the Tony events and really understood psychology.

Cause I, I knew for main street deals, psychology was really, really important. So I wanted to study that in depth. So one of the things that I learned from Tony Robbins was that, like our brains are used to dealing with binary outcomes, right? So if I said to you do you want a glass of wine?

You're going to say yes or no, right. If I said to you, David, you want a glass of red wine, a glass of white wine? Doesn't matter what time of day it is. Try it on your wife. You'll pick one or the other. You're the 2 million year old brain is designed to make binary decisions. So when I'm, when I make an offer to a seller, I'll never say, Hey, here's my offer because they're going to say yes, or they're going to say no, and often they counter. If you send them to offer side by side and say, Hey, here's one offer I'm going to give you.

It's a much lower valuation but I'm going to pay you 80, 90 percent of the money at closing. Or I'm going to pay you a much larger valuation, but I'm not going to pay you anything at closing over and above whatever surplus cash or working capital you have in the business, I'm going to pay you over a period of time. But then it's all about how you sell the negative benefits of the low valuation, high closing payment deal versus the higher valuation, no closing payment deal.

And there's five things. So number one if i'm doing a deal where I'm, I'm raising capital. If you're in the US, the the big policy over here is most people do something called an SBA 7a loan, right? So that's the, that's a bank pledges the money for a deal between 80 and 90 percent of the total purchase price. The buyer puts down anywhere from two and a half to 10 percent as equity.

And then there's a little bit of a, of a seller note. That can take five months, right? And the bank will give the seller brain damage with the amounts of due diligence that they do, right. So, it's a really long deal. It's very, very stressful. They're going to get less money because the bank's pricing the deal really. Doesn't matter what the seller wants .The seller wants something like me, you're at the mercy of what the market can bear and obviously interest rates have gone up in the US. 

So debt service cover ratios got affected. So the SBA isn't going to fund anything really above a four times multiple of recasted EBITDA. So, they're going to get less money. They're going to get all the money at closing or most of it. And they're going to lose about half of it in a federal and state income tax.

So then they've got that money and they're saying, well, well, I got to invest that now to provide an annuity for the rest of my life. So I can do a deal. I can buy a business in two days. Not using any external financing. I give them a full security guarantee over the business and the assets. I give them a performance guarantee.

Like a bank would sign you up to covenants when you do a cashflow lend. So minimum trailing 12 of months of EBITDA. Minimum amount of cash in the business at any one time. And I leave the seller with 10 percent of the business and access to the bank account. So they've got full security, full insight, full knowledge. Go back to the other conversation.

If you've not built world class rapport and you've not positioned yourself as the absolute knight in shining armor that's going to solve that business owner's pain and protect their business, their legacy, their employees, even the customers. It doesn't work, right? So you've got to put the effort into doing that.

But once you do it and you play the numbers game, you do this on, on several deals, one of them will say, yeah. And,the word annuity, I call it an annuity deal. It came from, I was talking to a business owner, um, about two years ago. And, um, he, he wanted a six times multiple for his business. Yet it was really trending at around two and a half to three times. And I said to him, tell me about your business. You must have the best business in the world for what you do to command such a premium valuation. Tell me about that. He said, why are you talking about multiples? I don't know what you're talking about.

My wealth managers value my business. I'm like, whoa, hang on. Your wealth managers value your business? He said, yeah. I said, well, wealth managers are not trained in the art of business valuation. Didn't you go to a CPA? Didn't you go to a business broker? Business brokers aren't really trained either, but let's not go down that route. 

[00:25:14] David Green: They are trained. They are trained to engineer a big fee at the start. That's what they're trained well to do.

[00:25:19] Carl Allen: So he said, yeah. I called my wealth manager. He said, I want to sell my business. He said, and I need to, I need $10, 000 a month for the next 20 years to comfortably live my life. So the wealth manager put that into his computer and said, well, yeah, you need to sell for this. Get all the money of closing, pay all the tax and fees.

And then we'll put that money into a, into an IRA or an investment product. And then after tax and fees that's going to pay you your income. So I said, well, why don't I just be the university provider? He said, what do you mean? I said, well, I'll just pay you ten thousand dollars a month for 20 years. He said you could do that?

I said, yeah. He said well, okay. He said well problem number one is there was, wasn't a broker deal. I don't buy from brokers, by the way. I all my deals are off market. So, he said well, who pays the lawyer at closing? This was a three page document. Like hire a lawyer, whatever they cost, we'll pay that money out of the business.

He said, great. He said, well, then my other thing then is, is my money, so I was paying him double what his business was worth. I was closing the deal in two days. I was doing little to no due diligence. I do very, very, very basic DD on this deal. I do most of the DD after I bought it, right? If I don't like it, I can give it back.

It's only happened to me once. So, he said, well, the only question I've got then is, is my money safer in my own company? Or is my money safer in the stock market? And he said, well, clearly it's safer in my own business. So we did that deal. And then,what I do, I think one thing that makes me unique and Jeremy Harbour as well, what makes us unique versus everybody else that tries to do this is we're teaching what we're doing, right? 

So I'll go out and I'll do a deal and then I'll teach it. And then all my students will do the same deal. So I remember pitching this annuity deal for the first time. I said, look, I've just closed this deal. Here's the sale and purchase agreement. Here's how it worked.

And everyone was like, that's never going to work. I said, trust me, try it. And since then, in the last two years, well over a hundred deals have been closed in my using that structure.We've done about $700 million worth of acquisitions in the last two and a half years inside of my community.

And, I'd say about a third of those have been annuity deals. So it doesn't work all the time. But if you get the right seller, build the right relationship, if they're income driven, a lot of retirees in America, we call them baby boomers. A lot of baby boomers in America don't really want a capital gain. They just want income. And you can pay them a lot more money. It's more tax beneficial to them.

[00:27:53] David Green: It feels like a pension, doesn't it? They can just literally have this coming in, knowing it's going to be largely for the rest of their lives.

[00:27:59] Carl Allen: That's right. But they have to trust you, David. If they don't know, like, and trust you, it doesn't work. 

[00:28:05] David Green: Because that's, that leads me onto the security of that because that comes up a lot in deferred. So I'll just call the deals I'm doing and people, you know, lots of people doing deferred deals. I'm probably working at the moment on about 30 or 40 million pounds worth of businesses and pretty much all of them are deferred.

Most of them, not all, but most of them are that kind of retirement age. And yes, rapport is built. I'm pretty, good at that. But, what comes up with the security part of it?What, what have you confronted with that and how have you overcome it?

[00:28:38] Carl Allen: Yeah. So when you're doing deferred consideration or seller financing as part of a deal stack, where you've got equity involved, you've got bank debt. The bank's always going to be in first position for the debenture, or we call them liens in America, it's called a UCC filing. The banks are always in first position.

So to guarantee a seller note by giving the seller a second charge, it's not really worth anything. The beauty of an annuity where there's no external financing going into that deal whatsoever is the seller can have a full net of both the assets and the equity inside 

[00:29:15] David Green: Right. So you expect to make the first charge. 

[00:29:18] Carl Allen: That's right. And then, so there's three things you need to do, right? Well, there's four things. The first thing you got to do is, is give them a full blanket security over everything, right? The second thing Is to give them a reverse covenant. So if you borrow money from a bank on a deal, they're going to, they're going to sign you up to covenant.

It's normally a trailing 12 months EBITDA. Cash in the business and a bunch of other different things. So we just do that in reverse. So we give the seller, we don't call it a covenant, we call it a performance guarantee. We're not going to run the business into the ground. We're going to give you these numbers on a monthly basis so that you know, we're, we're doing the right things.

Number three, we, we keep them access to the bank account. I've even in the past set up second bank accounts where all the money goes into that. Pays the sellers monthly payment, and then the rest of the money then goes into the main business account. And then number four, and this is a psychological hack.

I always leave the seller with 10 percent of the ownership of the business. And then show to them through a forecast model, either through organic growth or through bolt on acquisitions. How i'm going to create a big second exit for that seller. So what they're doing is they're able to retire or move on very, very quickly, with no stress, pay little to no tax in that first few years. And then, they're going to get a big second bite of the cherry when I eventually exit this business either through organic growth and a roll up. And then sometimes there's other things that come into play where the sale will say well, I really did want the closing payment. I'm happy to pay tax.

I'm happy to get less money, but i'm very attracted to the super quick closing. And they extremely liked us due diligence. So that's what we call an annuity option. So what we'll do is we'll start the deal on an annuity, and then we'll have a, say a six month period where we have to refi the business, right?

The last six of those I've done, only two out of the six still wanted the refi. The other four just got so used to the monthly payments and was so impressed with what the team and I were doing to grow the businesses. They just said hey, do you mind if we don't trigger the refi? Do you mind if we just carry on with, with the monthly payments?

Yeah, whatever. That's fine. So again, I don't want you to think this works in every deal. It doesn't, right. You might have to make 10, you might have to find 10 deals. I make 10 of these offers for one or two of them to bite. So it is a numbers game. But that's, that's how we get over security because there's nobody else in the frame. The seller has everything. 

[00:32:05] David Green: I could literally hijack you for a week just on this subject today. And there's so much to talk about.And I'm mindful that you probably, If we've got other things you want to be getting on with today, that I am keen though to understand,once you made that transition, we're just going to go back a couple of stages again.

Once you made that transition over from the corporate world, as you said, you would, you'd made not a small amount of money. You were talking about your mid thirties. You were going to be a stay, and think about being a stay at home dad. So you had means, but you'd have been commercial enough to know that, if I'm going to do something, do you almost behave like you haven't got means?

I know you've got means in terms of your relationship with your banks, money in the bank as well. What, did you sort of at any point panic and go, once you bought this first one, did you at all panic and go, I need lots of this on the go, because if I'm going to do this, I need to do it properly? 

[00:32:57] Carl Allen: No, so I was very lucky in that, you know, I was, I was born very, very working class up in, Accrington, Lancashire, right? So blue, blue collar family. Or, working class family. My mom was a hairdresser. My dad was an electrician. So only child. You know, I was always a saver. I was never a guy that was flash and like threw money away.

So when I was making the big money on wall street, I would be very, very diligent in saving that money. So I'd saved very, very well. And at 37, I could have retired for the rest of my life. But it was more, it actually made me ill. So I'm three weeks in, four weeks in to being a stay at home dad.

And my, my wife didn't want to go back to work. And I thought I need something. I'd gone from a hundred miles an hour flying all over the world, closing deals, that cut, that thrust, that vibe that you get from doing deals. You know what it's like, you know, it's like, it's addiction, isn't it?

And I sat back at 37 and thought, well, no, is this it? I don't play golf. I don't have any hobbies. I just like doing deals. So, but my one requirement was I didn't want to travel, right? So I wanted to stay close to my family. And I knew being a wall street guy, how people could buy companies without risking their personal money or their assets, I'd mastered the art of using other people's money to buy businesses.

So I just took that model and applied it on, onto main street deals. So when, when I bought the transport company, I signed no personal guarantees. I think I put 50, 000 pounds of my own money into that deal. And I had multiple seven figures in the bank at that point. So it wasn't going to kill me to lose 50 K, but you know, the business was cashflow in 45, 000 pounds a month after debt service anyway.

So I think I got my money back within 60 days. I just knew it was going to be a great deal, but I had so much confidence in the business. And I had so much confidence in the team.It was one of those life moments. It was just the deal of a lifetime. And I was in the right, I was the right person in the right place at the right time.

So, but was never worried about that. And, uh, you know, I've taken some risks since as my wealth has increased and I, I don't like talking about that really. I'm not, that's not kind of who I am, right. But as that's increased, I, I afforded myself maybe a little bit more risk. I've invested in a lot of my own students deals.

Some of them have worked, some of them haven't. I've bought businesses in the past and they've bombed, you know, I bought a massive company. I can't tell you the name of it, but it's, it's a multi billion pound UK business. I bought one of their subsidiaries, corporate carve out, no money down.

They just wanted it off the balance sheet. They just wanted it out of their head. We did that deal and then the corporate that sold me the business was 40 percent of my turnover, but 92 percent of my EBITDA. And two years into the deal, my business partner and I were doing really, really well. They yanked the contracts away from us.

Our business died overnight. We had to sell it to a pound, for a pound to a large, large Asian company. But, that, that experience, taught me very valuable lessons in like customer concentration. And one of the things I talk about a lot now, like when I'm presenting at events or, new book that I've got coming out, I talk about something called the transfer of value.

And I, I've become a massive student on valuation. And the reason I've done that is because most people, when they look at a business, they'll only look at the numbers. The valuation will be purely determined by the numbers. They'll take last three years, they'll recast the profit. They'll take an average, they'll apply an industry multiple, and then they'll adjust for debt, working capital, cash, real estate, all those things.

That's not the right way to do it. That's only one of the four things you need to look at, right? The second thing you need to look at is seller psychology and motivation. You can have two businesses that are completely identical financially and operationally, and they can have very, very different valuations.

If one seller's distress burnt out, needs to retire, he's going to sell, or she's going to sell for a much lower valuation on a much more creative deal, versus somebody that's not motivated, they might want a crazy multiple to sell, right? Some of the businesses I own, some of them, I give them away because they're a pain in my ass.

Some of them sell for 20 times profit because I love the business. It's making me a lot of money. So seller psychology never gets thought about, but I built, I built an algorithm that can measure seller psychology as part of the conversations and how that can translate to value and structure off of about 400 deals that have been done inside of my community and I can measure all that. The third thing is deal structure as we talked about annuity deals before. Like if you're buying a car on a lease you're going to pay a lot more money than if you go pay cash for it. Same with a business. So if you're buying a business, all the money's up front, you're going to want to discount because you're taking all the risks cause the buyer or the bank is. Versus if you're paying for a deal over a long period of time, the seller's taking more of the risks.

So that's got to be reflected in the valuation. Nobody talks about that. And then the fourth thing is what I call transfer of value. So if you look at the value of a company, multiple of EBITDA, and then you net out what I call the liquidation value. Which I typically use about 80 percent of the balance sheet at the time I do the deal. The difference obviously is, is the goodwill that you're paying for in the acquisition.

And I built a model to value that goodwill. I look at things like recurring revenue. So take two businesses, David, take a best in class business versus a business that's like not worth anything. Best in class has recurring revenue. It has, great employees, great systems and processes. The owner is an investor, not an operator. Great culture in the business, phenomenal employees.

Great reputation in the marketplace. That business will command a much higher valuation because everyone's going to want to buy it. So simple supply demand economics will drive that valuation up. Versus most businesses, only one in 10 or 11 businesses in America actually sell when they try, because they don't have all that stuff in place.

I went to look at a business in the aerospace industry. And this, this is a big business. 35 million in revenue. About 4.5 in EBITDA. Loads of cash in the bank. And I went to look at it and the seller gave me all the details. And, I did a full vetting of the business. And so he said, Carl, how much is my business worth? He said, I'll tell you why I'm asking. He said, I called my CPA, he said at 4. 5 of EBITDA, I'm probably worth a six or seven times multiple. Plus I've got the cash in the bank. So I think we're worth probably about 32, $33 million. I said, okay. He said, how much do you think it's worth? I said, nothing. He said, what are you talking about?

Nothing? He nearly punched me. I said, well, you're worth liquidation value, right? I recommend you liquidate the business and pull all the money out. That's what your business is worth. He said, how can that be? My CPA tells me, I said, well, let's look at your business for a minute. I said, how many customers have you got?

He said, one. I said, okay. Do you have a contract with that customer? No, it's my brother in law. Okay. So you've got a, you've got one customer who's your brother in law and I just found out he's selling that business to somebody else. So if I buy your company and he sells his company, then I don't have a customer relationship anymore.

So your business isn't worth anything. He went, you're right. You're right. Why didn't I think of that? So customer concentration is huge. You've got no recurring revenue. It's huge, right. I said, if you had a thousand customers and your brother in law was one of those customers, I'm fine with that, right.

[00:41:18] David Green: 20, 25 percent top customer. Have you? Have you? Yeah.

[00:41:23] Carl Allen: Yeah, absolutely. And like, this is why I, I hate Amazon businesses, right. So, I'm buying a lot of e com companies at the moment. And I work by a business that's got more than 25 percent of revenue derived from Amazon. You've got these companies online on business broker sites where they're basically Amazon businesses and they're crushing it, right?

But they're not worth anything because you don't control the customer. You're just a reseller into Amazon. You can't remarket to your customers. One of the problems with ecom is it costs you, 

[00:41:56] David Green: Can't add value. Sorry to interrupt, but you can't, how do you add value to that? What's the boat on? I get people coming to me, and I love with me, these kind of stuff. And instantly I say, I have this three golden rules. Do I like the business or does it excite me? Can I add value? And do I like the person I'm going to be working with?

And I, I think they are three golden rules. If those three box gets ticked, I'm in. And that, and I, one guy on a one of my calls, I run a Friday group, accountability group, we did it for a year now. Just over. One guy said, I've got this spreadsheet. Someone asked, he said, I've got a spreadsheet. It's got 72 points on it about what we have to tick to when I get involved.

And I'm sitting there scratching my ball dome going, you need three. That's it. The numbers, okay. Give me your other two. Are my three on your five?

[00:42:45] Carl Allen: Yeah. I'll, I'll give you my five. I'll give you my five. The first one is,can I add value to this business?

[00:42:52] David Green: Okay. We're one on one. We are.

[00:42:54] Carl Allen: Can I plug in my network? And am I passionate about it? So my first three. And then number four is, does the seller have what I call a high mood score? High motivation, high agency to close a deal and high levels of distress.

And then number five, cashflow. If it doesn't have 15 percent profit margins, I will never buy it.

[00:43:18] David Green: Have you always been that way? Have you always been that way? Or did that evolve as you became more and more successful in this space?

[00:43:26] Carl Allen: Yeah, that, that's kind of evolved over time. 10 years ago, I probably had 75 things on my list. But I realized that 70 out of the 75 don't really matter. It's just those big five key things. Obviously that's my filtering mechanism. So if I look at a hundred deals a month, I filter out 90 of them, and then the 10 that tick those five marks, then I'll go through the next stage of, of a bit more detailed vetting.

So what I do in every business, before I make an offer, is I go to a full transfer value analysis. So I look at the four pillars of goodwill. Employee, customer, structural and social, and then, me and my team will just vet the business along those lines as a hypothesis. Then we'll make an offer. And then the due diligence really is just to prove or disprove that, that vetting hypothesis.

So, so that, that's what we do. So, so my process is three stages. Does it tick the big five? Yes. Great. No. Get rid. Or I put it into my community. Then I do my transfer of value analysis. I look at seller psychology, deal structures, goodwill analysis. And then what that gives me is a whole range of different offers and computations about what I think the business is worth and what I could get it for.

And then I do my two offers side by side. And then they'll gravitate to one or the other. And then if it's an annuity deal, I won't do how the NADD. My, my attorney, I'll just make sure it's safe for me to buy. Cause I, I always buy the equity, not the assets. And then I'll, I'll just make sure they've done their tax returns.

The full financial DD I do after I bought it. And it's only ever happened to me once where it was a can of worms, I gave it back. But the seller didn't want it. So I gave it to the employees.

[00:45:15] David Green: Is the motivation for 53 year old Carl, the same as the motivation for 36 year old Carl? That you just don't want to be bored and you don't play golf. I play golf so I could easily find myself knocking one day a week for playing golf but I probably still work in the afternoon truth be told. But is that the motivation just because what else I'm going to do and I'm too young to retire?

[00:45:36] Carl Allen: Do you know what my hobby is? Coaching people. That's my hobby. 

That's my, I love coaching. So I spend 80 percent of my week, working on deals. And then 20 percent of my week coaching my community about what I'm doing. So it's real time at the coalface. Hey, I'm looking at this deal. This is what I'm doing.

And, just seeing these people be successful is just, it, 

[00:46:01] David Green: But does that flip over in your mind at any time? Because, I'm guessing the money's not the driver now. Obviously doing a deal is always an exciting thing. Who doesn't want to be in that room? Where you've kind of put your, you've read the room, what you were describing before, I call it, read the room. Read the fucking room, man.

So read the room, which you're obviously a master at doing. So it's not the money because it can't be the money now. It wasn't the money 20, 17 years ago. It's not going to be the money now. So is that motivation just because I love doing deals and at what point does that pivot where you do more coaching and less deal making?

[00:46:35] Carl Allen: Yeah, I think that line moves, doesn't it? Like, I don't believe I could ever be a real coach if I wasn't still doing what I'm coaching because I know that's the M and A market it changes a lot. Like there's people out there and I won't name names. They're teaching how to do deals from 10 years ago, right?

It's completely different now both in the UK and in the US. Like, like in the US the market's changed massively just in the last 12 months, right? So if you're not in the market doing the deals, how can you coach those people? Some weeks, I'll do a lot of coaching. I typically coach, I run three 90 minute coaching sessions every week personally and then I have a whole team of coaches. My attorneys, my CPAs, my deal originators, my business growth experts.

They do all their own coaching sessions as well. So, so my community, yeah, they're getting a lot of value from us throughout all the, all the different aspects. I love speaking on stage, I love coming on podcasts. I've just,my, my new book's coming out in about 10 days. Which I'm really excited about.

I've written a novel, right? This is what's bizarre. Have you ever read, I have a very, very good friend called John Warillow, who's a Canadian. Who wrote, wrote the book built to sell. So he has a company in Canada called the Value Builder System. He's like the big preeminent expert in the U. S. on sell side, right?

And you might have read the EOS book, Get a Grip by Gina Whitman, right? So the fables, they're not just technical books, they teach all the steps and all the technical aspects of either buying or selling a business. But they don't capture the drama, the emotion or the psychology that's involved when you're doing the deal.

So I wrote a book about an executive in, in a big PR company in America that wants to shift and be a business owner. Doesn't want to start a business because it's silly. Wants to buy an existing company, doesn't know how to do it, gets a mentor, IE me. And then there's all the deal origination that I teach my students off market deal origination, networking with a deal intermediaries.

Leveraging, social media, calling on people, et cetera. And then he finds a perfect business to buy. And then they go through the roller coaster of consummating that transaction. And then he then goes off, does a roll up and then sells out to a big PE fund, makes a ton of money.

So I, I wrote that, but 90, 000 words took me six months. But it really captures all the different things. And there were days, because I spent half of my time in Lancashire and half of my time at my house in Florida. So when I'm away on a weekend, I can just sit and write for 14 hours and I couldn't pull myself away.

I just, I found something in me because I'm creative and I'm passionate. And obviously, I know my subject matter inside out, back to front. I was able to write this book. And the people that have read it, my editor, my wife's read it, my two big business partners have read it. They're like, man, I didn't know you could write.

But I cheated, I took a class, right? I took a class. So, you know, masterclass? The online app.There's an author called James Patterson who writes like novels, right? So he does a class, a masterclass. So I went through that and I learned how to structure a story. I've written technical books before they're on Amazon, right?

But they're easy to write, if you know your subject. But to write a story, a novel and build characters and intrigue and open loops and all those different things, I didn't know how to do that. So I studied and then I wrote the book and, yeah, I'm, I'm really, really proud of it. So I think my, I think I've got at least five more years of doing what I'm doing.

I think by the time I get to 60,I might become an author. I might write business books, that are novels that teach how to buy, sell, grow, how to invest, all those different things. I think that's maybe my next calling and I'm really passionate about it and I really enjoyed it. It's called the Creative Dealmaker.

That's the name of my own podcast. That's the name of the book. So I'm, I'll send you a copy when it, when it comes out.

[00:50:49] David Green: Please do. Please do. I mean, couple more from me, is there anything that you've, industry wise, you've stayed clear of? Is there anything you still stay clear of? What might they be?

[00:51:02] Carl Allen: Yeah, so i'm fairly agnostic In terms of sectors, but i'll tell you the sectors I don't like. We talked about Amazon. I don't like online businesses that are pure Amazon. I don't like brick and mortar retail. I don't like franchises, so i'll never buy a franchise retail.

[00:51:20] David Green: Why don't you like franchises?

[00:51:22] Carl Allen: Yeah, so

[00:51:24] David Green: Do you mean the franchisee or the franchise? Even the franchisor?

[00:51:28] Carl Allen: Yeah, so I, sometimes I look at a deal and it's a franchise that someone's bought grown and wants to sell. Whenever you look into their franchise agreements the change of control clauses and the control the franchise will have on you. I don't like owning a business where someone's telling me what I can and can't do.

I want to buy a business, that's why I don't like to retail. I like businesses that I can scale boundaryless, right? So I like professional services, manufacturing, engineering, anything in the medical industry, technology, SaaS, E-com, online coaching businesses. Those are the deals I like because I can scale them wherever I want and no one's restricting me.

You buy a franchise, if you buy a Subway franchise, you know, there's one three streets away, right? Your market is your three streets, right?

[00:52:19] David Green: No. So, but you'd buy Subway, if you had a chance to have bought Subway. The, the IP, years ago. 

I'm at heads to terms with a, with a British fast food franchise. It got 13 out outlets and they're retiring. So I'm ahead to terms buying that, but I'm the franchisor. I've become the franchisor.

[00:52:39] Carl Allen: Great business. Yeah, because now you own the race course.

[00:52:43] David Green: I what?

[00:52:44] Carl Allen: You own the race course in that deal. 

[00:52:45] David Green: Yes. No, exactly. Oh, I wouldn't buy a franchise, I'd never be a franchisee. I want to be the franchisor.

[00:52:52] Carl Allen: Yeah.

[00:52:53] David Green: If I'm coming to play football with you, I'm bringing the football.

[00:52:57] Carl Allen: Yeah. Yeah. 100 percent. So those are great deals. So I'm pretty, I'm pretty sector agnostic for the most part, but I'll never buy, cause, cause I'm more very, I'm kind of very horizontal. There are some industries I know really well. I own a bunch of CPA firms. I own a bunch of online coaching companies. I own a bunch of e com businesses.

I know those industries like inside out. But like I've done engineering deals in the aerospace industry that I don't know much about. I bought HVAC businesses that I don't know much about. So I'll partner with somebody. And the beauty of having a massive community of fund with dealmakers, and I get to know them very well as I know who my partner is going to be and they all want to do deals with me, which is lovely. And they become my operator and we'll buy those businesses 50, 50. So it's, it's a great, it's a great way to do it.

I've got somebody with, with brain, power and gray hair for the niche or the sector. And then I've got the sales, the marketing and the financial management skills and the ability to raise money and do deals. It's always a great kind of combination.

[00:53:57] David Green: I want you to plug the things you've been talking about. So everyone knows how to get on board with stuff like that and your books and your courses. But, I'm super passionate about JVs. Um, in fact, I started my own accountability group and I originally called it a JV group. But I, I'll tell somebody don't like go to KBS and then come to somebody who's got means, a footprint, or whatever and say, I've got a deal. Can you help me do it? And then expect to be, you know, half and half or something. So what's important to you for, for your JV partner? I mean, hypothetically, someone comes to you, off market opportunity. They don't have the money, but what is it you look for if they can't put the cash in, what are you looking for in that JV partner?

[00:54:49] Carl Allen: Hunger. They're very coachable. I'm looking for noble entrepreneurs. I don't like people that have a bitch voice, people that complain. I like people that are positive. Very knowledgeable about the industry. Want to learn and will do the things that I don't want to do. I, you know, work in the business and drive the bus and let me just worry about the culture, the strategy, the capital and all those different things.

So, uh, so that's typically, what I'm looking for. Yeah. I put them through disc assessments and all that kind of stuff as well. But yeah, that, that's generally what I'm looking for.

[00:55:25] David Green: I knew we were close to finishing. We've probably gone over. Just tell everyone who gets to listen to this, about your courses and your books.

[00:55:33] Carl Allen: So the best place to, to see all the things I'm doing and get in touch with me is, at Carl Allen official. Go to my YouTube channel, like tons and tons of content on there. And then at Carl Allen official on my Instagram, where they can message me. And, get lots of free tools and lots of free resources and all the different things.

And I think, consume all that. And then if you think business acquiring is something that you want to do, yeah, we've got coaching and programs and all that different stuff. But yeah, that's not the first step. Go check out all my free stuff. And if, if,it's something that you want to take forward, yeah, we, we can definitely connect.

[00:56:10] David Green: Well, this was Ronald Skelton's How2Exit podcast. I'm your guest host and thank you so, so much to Carl Allen for joining me.

[00:56:21] Carl Allen: I've really enjoyed the conversation. It's great to speak to somebody that is from this world and knows what I'm talking about as well, which is great. So, so appreciate you, uh, you doing that with me. And, yeah, next time I'm in the UK, let's go and have some beers with you. Let's talk more.

[00:56:35] David Green: Yeah. Ditto.