Unofficial Partner Podcast
Unofficial Partner Podcast
UP450 Other People's Money: How to Sell (or Buy) a Sports Business
Other People's Money is our regular series on sports investment, with co-host Matt Rogan, co-founder of Two Circles.
Today we get in to the minutiae of deal making, with Steve Hacking, managing partner at Latitude Partners, who has worked on more than 200 company acquisitions for clients across both buy and sell side of investment deals in sectors ranging from technology and telecoms to media, healthcare, retail and sport, including working on behalf of Sky Sports and British Cycling in the creation of the Team Sky Pro Cycling team.
So, nobody better to interrogate the tricks of the due diligence trade, how to analyse future potential and what to look for when buying or selling a business.
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Hello. It's Richard Gillis here and welcome to Unofficial Partner. This is an episode of other people's money, our regular series on sports investment. With my co-host Matt Rogan, who is a co-founder of two circles. Today we get into the minutia of deal-making with Steve hacking, managing partner at latitude partners who has worked on. More than 200 company acquisitions for clients across both buy and sell side of investment deals. In sectors ranging from technology and telecoms to media, healthcare, retail, and sport, including working on behalf of sky sports and British cycling. In the creation of the team sky pro cycling team. So there's nobody better to interrogate the tricks of the Jew diligence trade. How to analyze future potential of a business. And what to look for when selling or buying a company.
squadcaster-jb32_1_09-19-2024_095916:do those projections of the future make sense? given the numbers that are in front of me. And can I believe the numbers that are in front of me? Is it a projection of what has actually happened in the past? Or is there some kind of step change? And if there is a step change, do I believe the rationale for that step change? Second is, Are they using a source that is credible? some that I see virtually every time in transactions on the sell side, I just ask myself, why use that source? Nobody, no one believes that.
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UP:Unofficial Partner is the leading podcast for the business of sport, a mix of entertaining and thought provoking conversations. With the who's who of the global industry? To join our community of tens of thousands of people. Sign up to the weekly Unofficial Partner newsletter and follow us on Twitter and Tik TOK. At Unofficial Partner.
Richard Gillis, Unofficial Partner:Matt Rogan. Hello.
Matt Rogan:Hello again.
Richard Gillis, Unofficial Partner:Hello again. Other people's money. Steve, welcome.
Steve Hacking:Good to be here. Thanks for having me.
Richard Gillis, Unofficial Partner:Not at all. And there is a load that we're going to be talking about. First of all, I think we need a bit of biography. Give us a bit of background. About what you, what do you do all day?
Steve Hacking:What do I do all day? So I and my company and my team we work on What's called buy side and sell side transactions. So, buy side is working on behalf of the investor, and sell side is working on behalf of the business who wants investment. And, we do an aspect of due diligence called commercial due diligence, which is looking at market competitive position, how how well the company is performing with the customers, and we are ultimately interested in what's going to happen, the security of the revenue line, the gross profit line, and what's going to happen to that over the next three to five years. That's on the buy side. On the sell side, we get involved a little bit earlier. We help, uh, businesses get investment ready. Uh, we help them put together a sensible business plan that's backed by Evidence to the extent that you can gather evidence on some of the sides of the businesses we work with. And we work all the way up through the transaction when we are on the, uh, sales side and somebody else is due diligence ing our work. So we do both of those things.
Richard Gillis, Unofficial Partner:give us an example of the sorts of things. I know there's a range of whenever it gets to investments, people get to the number and we're between, you know, we're in a bracket between whatever, however many millions it is, but just give us an idea of the sorts of things.
squadcaster-jb32_1_09-19-2024_095916:Yeah. Yeah. Okay. We work in what's called a lower end market and mid market. So that's, I always think in terms of profit. So companies with profit of between 1 million and 25 million multiples can vary. So that can mean transaction sizes from as low as 8 to 9 million. All the way up to, uh, 250 million, something like that. So, that's the deal sizes and we work across sectors. So we pretty much reflect the market mix and the market mix for investors is still fairly heavily technology driven, although it varies in times of boom and, and less boomy times like now we, I'll just tell you what we're currently working on. We're currently working on Sellside for a business that, uh, turns old tires. Into a product called carbon black and something called process oil, which is then used to make high value chemicals. So they recycle all tires. So work on the cell side for a business doing that on the buyer side, we're working for a investor looking at, uh, event management company. Uh, it's not in the sports space, but it's in brands and employees space. Those are a couple of examples of things that we're working on, but, uh, We've worked across the piece. I guess our, our, for your audience, our. We've done a handful of things in sport. We helped British cycling set up the professional road racing team that eventually became Team Sky. So we helped them on sell side. And in that situation, we then flipped over to buy side to Sky. Because they wanted to understand the media value of the team to see if it was worth it. Investing in sponsoring and on the sports space, we've also done a due diligence for a media company on a premiership football club, uh, quite a few years ago. But, uh, we, we only do a few things in sport. but I guess, it varies by year. Currently we do an awful lot of stuff in green tech because that's very in vogue. And there's a lot of investment going into it and therefore we get drawn into that.
Richard Gillis, Unofficial Partner:Who pays you What's the, the model. Due diligence is one of those phrases you bump into normally when people say, Oh, they should have done their due diligence or they could have done, or they missed something and all that thing. So there's a lot of cliches hanging around that, but I just wondered, what's the business model from your point of view?
squadcaster-jb32_1_09-19-2024_095916:Yeah, so the payment, I'll talk about the buy side because that's overwhelmingly the most common form of due diligence. And it depends whether the deal goes through or not is the answer to that. And In most cases, by the time you get to due diligence, the deal does go through in the vast, vast majority of cases and we get paid out of NUCO. So that's the entity that's formed following the investment for all the new shareholders. And that payment is part of the transaction cost. And that, transaction investment is ultimately coming from. In our case, the private equity company and the private equity company's investors. So, that's if the deal Goes through if the deal doesn't go through, then the investor and the investee or the, the, the wannabe investee they, they have, they typically have an agreement about how they divide the costs of due diligence and usually the due diligence providers having a bought arrangement where they get paid quite a lot less. If the deal doesn't go through so in our case, we probably get paid about a quarter, of the success fee if the deal doesn't, if there's an abort fee
Richard Gillis, Unofficial Partner:just on that, so. Again, I guess the obvious question is, so you are sort of incentivized for the deal to go through. What, what are the implications of that in terms of where you're going into an organization?
squadcaster-jb32_1_09-19-2024_095916:On the face of it, you're incentivized for the deal to go through, but the reality is that everybody in this market has got relationships with everybody else in the market. And you cannot afford for your reputation to be blown for the sake of one deal. You know, we have done, uh, between 250 and 300 transactions. And more often than not, we've said we're concerned about something and the deal has gone through versus we, as being not concerned, you know, and the deal hasn't gone through. So if anything, you know, we're, we're working against our short term economic interests by saying you shouldn't do it, but the trust that we develop with, Investors is a thousand times the value of the fee. And that's what makes investors come back to us. Not just our sector knowledge, but the trust in us that we're going to give them sound advice.
Matt Rogan:I think about Steve gave me a gave me a really good description of the different roles of sort of corporate finance versus, versus, sort of people providing due diligence. And he said that, you know, it should be corporate finance sort of selling, And I say it's a bit like a, an estate agent and due diligence, it's like a surveyor, right? And I remember when the surveyor went to look at the house we were going to buy and told us that absolutely no foundations on the lean to at all, this sort of little bit on the side of the house. It was a pain in the ass cause it meant we had to basically look at something to do. We had to either take it down or add a new wall into the house. We still decided to buy the house. But we went in sort of all eyes open.
Richard Gillis, Unofficial Partner:Yeah, they always find damp, don't they surveyors?
Matt Rogan:Yeah,
squadcaster-jb32_1_09-19-2024_095916:Matt's house experience is, I think, a good example of the mindset of an investor going into a transaction. organization looking for money, obviously wants to put the best foot forward. They want to get the best deal that they can. They employ. A corporate finance advisor who works on their behalf to do that. And they present a very attractive, positive picture of the business. And like all of us as house, all of us as house buyers investors know that. So in their minds, they're looking at the management case of the business and they have a slightly discounted case, which is their investment case. And then they have a further discounted case, which is their banking case, because they're often borrowing money from banks to pay for it. So they know. It's not going to be as attractive as it looks in the management presentation. They expect there to be things that they deal with, but they're thinking that ahead of time. And as long as they are, they've got belief in the management team that they can be confident that the numbers are going to work and that there's a growth story that's attractive to them. They'll still be interested, even though it's virtually never. In fact, I would say never as attractive as it is positioned when it's being marketed.
Richard Gillis, Unofficial Partner:It's also they, I mean, without stretching the housing analogy to breaking point, but the buyer comes in quite often with hidden objectives and or they don't want to share what they're actually going to do with the company. If you're going to come in and say, right, okay, it's going to fit into what we've got planned over the next five, 10 years. There is an element of, okay, we don't want to share that. Cause our price, you know, they'll charge more. It's more seemingly more valuable. So there's a sort of game being played within the deal making process where it gets to what value means, I guess, in terms of the, it's just so subjective because of potential versus, the nuts and bolts of, what a business is doing today,
squadcaster-jb32_1_09-19-2024_095916:Yeah, yeah, yeah, absolutely. So, so, I think that's one, one major thing. That's the investors are interested in that. They're also interested in the downside as well. Yeah. So first of all, they want to know that that business is going to be able to be successful enough that the bank is never going to ring up and say, You know, hang on, you're breaching some of the covenants that you made about some of the numbers of the business and that means we're going to start getting involved. So, that's the first thing they want to know that it's an investment they can be confident in and that's usually to do with, having sufficient repeat recurring revenues and gross profits that you're starting next year on a relatively well known basis. It's easier to grow from there anyway, but it gives you confidence that you're going to be able to service the debt. And then they want to believe in the growth story. And some investors look at each investment on a standalone business basis. Others have got more strategic reasons. So. They don't give away too much when they're in negotiation, but pretty much highest bid wins anyway. Once you get to a stage which is called exclusivity, Where you sign heads of terms. So this is the deal that we're going to do. We're all agreed. The investee opens the books then the conversations become a little bit more open. And then at some stage during that transaction, the vendor is not necessarily the exact same thing as the management team. is overlap because some management team have got shares and they stay interested, but it's not quite the same thing. At some stage during the transaction. the management team sort of changes oversights from the current owners or the previous owners to the new owners. And then those conversations can become a little bit more open. You can talk about possibilities, et cetera. And all the time, the investor is thinking, can I back this management team? Do I believe in this management team? So it's. Certainly as well in the management's team's interest to be honest and upfront, but also open about possibilities because they are often buyers as well as sellers, they get shares in the new business. And sometimes say a retiring founder or something like that. And the next generation is taking over their interest in the business going up. So there are more buyers than sellers. So you've got those dynamics to think about as well in that process.
Matt Rogan:it's exactly the same having been at Two Circles during the move from a FTSE business to a PE backed business, you know, actually the, the sort of the incentive model and the engagement of the management team around that was, was higher in this, in the second bit, in the second life of Two Circles, as opposed to under WPP ownership. Uh, the opportunity to cut employees in and think about that differently was, was really a key part of the rationale of the deal. And I guess if I think about, you know, downside risks, super interesting for me in the sports space. And we talked in a lot of the previous episodes about sort of agency environment a lot, I guess, just because that's my background and John, who we interviewed last time with Sam. if you think about it in a, club or a team environment, what could downside risks look like that? So if I was, I'm going to use a Chelsea example again for which apologies, but it has been quite recent. You know, if I'm bowling Clearlake looking at Chelsea from the outside, you know, I might have read some stuff when I make an initial bid around, you know, the fact actually Chelsea pitch owners own the stadium freehold. I might not understand the exact legal implications of that. I might have read some stuff around hopefully read some stuff around the fact that there's relegation in you know, in, in English football. And so I might have wanted the guys at 21st group, I think do a lot around what's the exact probability that relegation might happen given the strength of this squad and how do I factor that into my model. The deal. But It certainly opened their eyes to some of the challenges with the property they brought on, but they've nevertheless, they bought the house, just not the
squadcaster-jb32_1_09-19-2024_095916:Well, that, that last point that you made, Matt, is, the underlying value of due diligence. So due diligence has got two values. One is, you know, show me any red flags why I should either not do this transaction or do it on different terms. The other value is let me understand this business better and help me understand this business better so that I can act as an informed non executive investor in this business. So I can think about the things I need to think about as a non executive. What is the strategy? What should our targets be? And how should I, how should I be incentivizing and holding management to account? Who needs, who do I need to add to that management team to run it and let them run it? And due diligence. Dominant value of it in every case that the transaction goes through is that as opposed to the checking for red flags.
Richard Gillis, Unofficial Partner:let's let's just pursue the football club thing because it's an easy entity to talk about because I think a lot of the issues that we'll talk about and we can anonymize it and we can just call it a Premier League football club. It doesn't have to be Chelsea, although it's fun dissecting Chelsea as a Spurs fan. I'm interested in. So, You said you're the commercial when you're looking at the commercial future of a Premier League football club, for example, and then so my head goes to conversations we have on this podcast all the time is about the bundle, the unravelling of the media rights marketplace, potentially the shift to D to C from, you know, fans becoming more like customers, football clubs being a bit more like sort of transactional with them becoming better at Selling the various wares. There's minority partnerships available and the Man United model, Ratcliffe's come in with his team and, you know, they're looking to do different things there. So I'm just interested in how you then go about the job of predicting the future of a Premier League football club. So are you then going to the sort of vendors of research that are out there and you're trusting How do you penetrate the validity or the robustness of the numbers, the research businesses of various sizes and stripes? Is that your, you're sort of putting your faith in their numbers?
squadcaster-jb32_1_09-19-2024_095916:I can talk generically about that. I can't talk specifically about and I, I won't talk about Chelsea. I can't I'm a blackness for one second. So generically I As somebody who's reviewing the business, you've got an incredibly short amount of time. If you're on sell side, you've got all the time in the world to prepare things, get things ready, think about the plan, the basis, etc. On buy side, you've got an incredibly short amount of time. The whole due diligence process can be 2 3 months and our aspect of it, 3 4 weeks. So what you're doing is, first of all, you're looking at management's strategy and management's plan, and they will have all these different aspects to that plan. And you're assessing those. You don't have time to come up with anything new, unless during the process, a strategic customer says something mind blowing, which occasionally happens very, very, very seldom. So you're just reviewing those and you're reviewing the, the basis and the rationale behind them and also to a degree the conservatism because those, those plans have virtually always got quite a lot of value in them. And so as someone who's looking impartially at it, you can say do those projections of the future make sense? given the numbers that are in front of me. And can I believe the numbers that are in front of me? And we've got various tests that we do from having done this for a very long time about whether we believe the numbers in front of me. One is, is it a projection of what has actually happened in the past? Or is there some kind of step change? And if there is a step change, do I believe the rationale for that step change? Second is, Are they using a source that is credible? And it's actually quite hard to do that if you're not used to looking at sources, uh, because some, some that I see virtually every time in transactions on the sell side, I just ask myself, why use that source? Nobody, no one believes that. So you are familiar with the quality of sources. And then finally, you just do a reasonable sense check on things and say, you know, does it, does it triangulate when I add these things together? Does it, does it make sense versus what I've seen other clubs do versus what I've seen happening in similar environments versus what I've seen this club do in the past and the trajectory that it's on. So that's what, and also you don't look at everything. You can only ever look at the big material things. So there might be. You know, 20 aspects in a more complex plan, 10 in a less complex one. You probably look at the top three, that's all you, and, if the remainder of 50 percent out, it doesn't make any difference to anything. So you just look at the big ones on the eight to 20, you know, prioritization that you're doing, concentrate your efforts on those, do a good job on those. So that's, that's how you address that issue of lots of complicated things. Lots of data sources, very little time to do with it.
Matt Rogan:to make that maybe build on that in the sort of specifics of the sports space. some of the challenges I think in sport is a, the market information is very poor. So the existing market information is very poor. Frankly, I, struggle to believe anyone really knows what, the five year, realistic five year broadcast projections are against digital rights fees, against sponsorship income, let alone the ways in which all those interrelate. And then you look at, you know, the changing dynamics of player costs as well. And the whole thing, if we stay on the football club analogy, that's not easy to model and therefore I think, I think there are environments in sport. I know two circles, we did this when we were asked to validate our numbers where rather than saying, look, we think the, the market for data driven marketing, digital services, and strategic consultancy in sport is going to grow at 10 percent per annum because frankly, I could have made a number up, but nobody, there were no market reports or any other one. We were kind of doing the only ones doing it. So nobody else could sort of validate that. We sort of started bottom up and talked about, okay, well, the acquisition of our client base looks a little bit like this. Our churn rate is this on average, the cost of our team look between this and that. We aspire to build out some more tech in the offer and that would mean that that cost, that direct cost is going to transition up from this to that and sort of did it bottom up. But only because we had to, because the lack of quality information in sport. Steve, you mentioned green tech earlier on. I guess that's a little bit like that as well, really, who really knows the way the environmental services market is going to change.
squadcaster-jb32_1_09-19-2024_095916:yeah, yeah. It's some, some sectors are like that. Green tech is like that. And also pretty much every small business at the bottom end, by small, they're still not split a million pounds profits. Not bad. They usually in markets where, you know, you look at, you look at what the corporate financier has said and they're in a 3 billion pound market that's growing at 20 percent a year. But when you look at the bit that they're addressing. It's a tiny fraction of that and it's not really, and the broader mark is not really relevant. So you've still got to do that bottom up that Matt said to piece that together. You, you've got, you're trying to create a jigsaw puzzle with three pieces, you know, and you've got to try and work it, work it bottom up from a combination of internal information and external information, just draw, draw it together. And manage the uncertainty by saying, Well, what do I believe least in this? What's material if it does go wrong? And show me the effects of that scenario. And if, if you're, if you're okay and you're comfortable with that scenario, then at least you've got a comfort for the basis. And then you can start thinking about the growth story. You don't have to be 100 percent confident in the growth story. You just got to believe in the team and their ability to achieve it. But you do have to be very confident about, you know, what's it going to look like if the things that. Look like they could go wrong, do go wrong. So if you've got that envelope to work within, then you're in a much more comfortable place than trying to be accurate to the nearest 5 percent on everything.
Richard Gillis, Unofficial Partner:I like the, you mentioned there about, are there any step changes or is it just projections from previous performance? And we did a thing, I've mentioned this a few times, but the European football association, the ECA, and. When you're in that room, there's a lot of people looking for step changes. They, they can see incremental nudges and tweaks to commercial revenue, sponsorship, you know, sell a bit, a few more shirts here, whatever. They're looking for someone to sell them a step change, you know, whatever. that is. However that's manifested, whether that's sort of, you know, a new entry into the media rights market, the Amazon, Netflix are going to come in And save the day. It's all going to be fine or whatever it is in other industries. Is that the same? Is everyone looking for step changes? Is that, is that part of the game? I'm, just interested, you know, you've got green tech where you think, okay, I can see that a lot of it is a promise on. The future of some, some shape or form and in sport, quite often people talk about, it's a, it's a volatile market to put, to invest. And I'm always interested in the relative volatility, if you like, compared to other sectors. So I don't know what, I've no idea what green tech is like from a, you know, an investment perspective, whether it's risks and rewards, how it compares to something like sport, for example, football club.
squadcaster-jb32_1_09-19-2024_095916:Yeah, well, it's, it's got, it's got a lot of similarities, a lot of differences but it still does have that step change aspect to it that you described. And I In our experience of sectors and businesses, positions in sectors, uh, the presence of the step change and looking for the step change is a nice to have. In, in most sectors you've got
Richard Gillis, Unofficial Partner:not betting on the step change. It's a, you're,
squadcaster-jb32_1_09-19-2024_095916:well, yeah, yeah. You, you, you're taking an option out on the spec, on the step change. So you are making sure that your backers and your bankers are still happy if the step change doesn't happen, but. You know, you're in a position to take advantage of it and they'll be delighted if it does and you structure the deal accordingly. And, those step changes, they get an awful lot of additional rigor in their investigation. And you can do things around them, such as, so for example, I don't know what the equivalent in sport, in sport would be. Insurance is quite. a common tool to use. So there's a new technology that's first of a kind. So it's got to be built. It's going to cost millions of pounds or dollars and it's got to operate and then it's got to work properly and it's not going to break down, et cetera. And you can actually insure against that. And that's very, very expensive insurance, but the value to the Potential equity investors and bondholders of having that insurance and the insurer will say if this technology doesn't work Then we will cover all of the fixed costs and the capital repayment costs and the debt repayment cost and the debt interest costs until it's fixed and That's a tremendous value. So, you know, I think Examples I think I've in sport are teams Ensuring top players, right? I think that's a similar example. Matt could probably talk to you a lot better than I could.
Matt Rogan:Yeah, I mean that is ensuring against top players. There's a little bit I've seen of ensuring against, uh, challenges with the launch of, say, new digital streaming products where you have a, 10 to 15 marquee leagues relying on that product for the beginning of their season. And that point of pressing the button is very high visibility and very high risk. So I've seen a little bit of that happen in North America which has just allowed,
Richard Gillis, Unofficial Partner:do you mean a sort of eye follow type, you know, football
Matt Rogan:yeah, but on a more industrial scale, so bigger, bigger, but exactly that. From a, data and digital agency perspective, one of the things that's interesting to look at is insurance in respect of massive data breaches. So how you ensure against the core DNA of your business, especially if you are moving to a new platform or something, the kind of thing that can calm everyone down and has done calm me down once in the past. So yeah, it's just, it's underused, I would say, in the sports space it's misunderstood. In the sports space, I would say.
Richard Gillis, Unofficial Partner:I mean, the other, the other dynamic to it, which again, again, if we just keep finish off on the football club analogy is, is it's dependence on the league's commercial success and the commercial revenues coming into the league is obviously that, you know, so you've seen the American owners coming in and, wanting it to be more NFL like, want to be too much more sort of controlled and closed and The rest of it and all those cliches about the chaos of Europe and, you know, the perfect American risk free model for the investment. Is that, again, Steve, that sort of interdependence, so I'm just questioning, so your due diligence, you go into a football club, how much of your due diligence is actually about future of the league, you can sort of see the same thing. Yeah. Commercial dynamics at play, but in football or in other sports, rugby, it's so dependent on the central, you know, the revenue is being generated centrally and then distributed out. You can see it in cricket, you see it in rugby, you see it in all the, you know, virtually every team sport. Is that the same? I'm just wondering where you stop
squadcaster-jb32_1_09-19-2024_095916:yeah, so anything that is going to materially drive revenue and profit is included. So in, in football, I got one example, you know, to, to draw on, but that was absolutely critical to it. and just as important as the performance of the club. in most of the situations, we always look at the market. We always look at the trends in the market. We always look at what is driving revenue. So that can be from the customer side, but it can also be from funding, which is probably the equivalent to that football analogy in, in, in other markets. And what's going to happen to that? And it can be quite binary.
Matt Rogan:Can there also be, Can there also be, government regulation, Steve, in some of these areas? So will the government turn a market on or turn it off? You know, it's fundamentally out of the control of the business you're investing in, but I don't know. Yeah, exactly. If betting, betting opens up in a new state or areas of health tech, for example, become legal that weren't, that's material. I completely agree with that. And I
squadcaster-jb32_1_09-19-2024_095916:Yeah, regulation and changes in regulation are always one of the big changes to the environment that we look at and potential changes to the environment that we look at and they're not always negative. You know, there can be compliance of businesses. It's just a gift that keeps on giving. So, uh, regulation is one of those ones that I would say over time as, as increased in how important it is. I, the markets we look at become increasingly regulated over time. And so it does affect the market players. It does affect how they behave. It does affect how easy it is to enter. It does affect the cost of doing business. And now that's gonna change. And it does affect the comp, the competitive position of different businesses. It usually favors scale. So it usually favors the bigger businesses. So we, we definitely, you know, look at, look at that. Yeah. Anything that's gonna materially affect the revenue via the market or via the performance of the businesses is, is important to look at in td.
Richard Gillis, Unofficial Partner:There's another sort of jump again, it's from, and it's the tech. Question, and it go away from the football club for a minute and just talk about, you know, the, the last 10 years has been a sort of the sports tech marketplace and however defined, whether that's wearables or whether it's AI or whether it's, you know, it could be web three stuff. And we said web free shit, then I said web free stuff. again, I'm, I'm thinking about the green tech. element to it. And my assumption being this is a lot of these businesses go bust. A lot of these, in the news, people like me are presented with sort of releases where Rory McIlroy has invested in this, tech startup it feels like a very high risk environment and they quietly either disappear or, you know, nothing particularly happens. Again, is that, is that just part of the tech equation.
squadcaster-jb32_1_09-19-2024_095916:Yeah, yeah, it is. So there's a, there's a whole section of the market below the level at which we work which is pretty much startups or almost startups, very, very early
Richard Gillis, Unofficial Partner:So your million quid profit is going to be a barrier to the vast majority of sports tech startups, isn't it? Presumably.
squadcaster-jb32_1_09-19-2024_095916:for so that's where we get involved in DD, but there's investors that, That's invest right from the get go. And their mindset is much more spinning the roulette wheel. You know, they are thinking they've got a portfolio and they need a portfolio. They are thinking I invest in 10 businesses. Yeah. Five of them probably won't make it. Two or three of them will limp along. One will do pretty well. And one will smack it out of the park. And that is where I met my. And I need to have that portfolio. And I don't know from the outset, which one it is. I just don't. So, so that's people. Investing earlier. And that can be below what's called institutional investors. It, that, that can be now down to individuals like Rory McIlroy, you know, so high net worth individuals, family offices. So people that are interested, just kind of interested in those businesses or want to put in, you know, a few tens of thousands or hundreds of thousands, or maybe a million, but very, that's very unusual. And. Have a look and be proud of the one that succeeds. That's kind of the mindset of the investor in that space. They're much more interested and intrigued. about, about the business. And there's a downside to that. And it's something that we see in green tech. And it's something that I see from the outside in sport. And that is how passionate the investors are and how much they believe in the in the business or in, in, in what they're investing in. And this might be controversial, but I don't think that's a good thing. If I can explain, explain why. So most businesses, you need passion. You've got the passion in the CEO, hopefully, product development and sales. Those guys really believe in it. They are attracting the customers. They're attracting disproportionately good talent. And they're full of ideas. And if you let them loose with all those ideas, the business will go bust within months. So holding them to account and challenging them. You typically are finance director, operations. You've got to make it happen. You've got the investors who are looking in from the outside saying, does this make sense? Is this going to make us more valuable in five years time? Can we still pay the bank debt in three months time? In some sectors where you get a lot of passion, you don't have that, that holding to account strength. And I think sport is one of those sectors. Where everybody's passionate, everybody believes in it, they want it to happen and we all want it to happen, but it can't be the case for everybody. So I, I think that's a big a big issue in sport and, and, and something that is important to think about when looking for investors that you, you, you still need the dispassionate investor who's going to hold you to account. You need members of your team who will pour a bit of cold water on your brilliant ideas. And running to the
Matt Rogan:In our industry right now, most of the deals are led by people who've also drunk the Kool Aid and have worked in the industry, um, for the last sort of 15, 20, 30 years. Very experienced, but they're sort of egging on the sort of startups and sort of early series, maybe well pre seed, post seed businesses to be Just as evangelistic, chase the long term goal, et cetera, et cetera. And a lot of cases, that's the last thing they need is the discipline and the structure and some experience. You can deliver that in the most intelligent way. Sure. But you know, I think they often need more support to put the foundations of their house in earlier than they realize.
Richard Gillis, Unofficial Partner:Isn't that the sort of private equity argument that, you know, they come in and they see value in sport in that, that chaos or the, you know, the passion, the inefficiency of passion, if you want to, if that's even a phrase, but there is something in that, that they're saying their argument is We're the grownups in the room. We'll come in and we'll, you know, we are, it could be insurance today. It's a football club tomorrow. That's that sort of, that's their basic sort of
Matt Rogan:But don't forget, don't forget. They're the ones that they're picking out the one in 10, right. That have already been through that process of, I guess, sort of strongest survives. So they're picking out that one in 10 and then putting that foundational discipline in rather than picking, uh, the businesses up early, you know, for the two circles, the single biggest thing we did was build foundations early and we need it because our FD was a venture cap, former venture capitalists and that's why we survived.
squadcaster-jb32_1_09-19-2024_095916:Yeah. Yeah.
Richard Gillis, Unofficial Partner:lower risk entry point.
squadcaster-jb32_1_09-19-2024_095916:Yeah. And that, that is a tremendous amount of the value of particularly. mid market private equity investors. they've been through this process, each of them many times in their career. They, they've worked with An entrepreneur and an idea and a good team and a few customers and a great product and helped put in the business foundations that those teams don't know how to do. So, you know, they, they, they, they put in processes where the entrepreneur can delegate to their team and they'd have to make every single decision. They put in KPIs so that people are measured. The very fact that you have a board meeting. means that, and, and somebody, sorry, I just got my cat out of the ring the very fact you have a board meeting and you've got to produce a board paper and you've got to have a thought about the things that you said you would do in your strategy. And you've got to think about what's going to happen next month, the month after what the year end looks like. What's happening as all the KPIs that you promised that you would deliver against is a tremendous value that as an entrepreneur, if you didn't have that there, you wouldn't do it. You know, you go and see the next customer. Cause that's always more urgent. So those, just those practices that just come from the very presence. Of someone like a private equity investor or a dispassionate third party. It doesn't have to be private equity, just dispassionate. Third party investor is incredibly valuable to those earlier stage businesses that don't have that already.
Matt Rogan:If I think about, we haven't talked a lot about sell side, we've talked a lot about buy side here, but I think about sell side, you know, sports businesses. Going into this due diligence process, knowing they were going to a sale are woefully underprepared, actually woefully underprepared. Like if I think about the journey we went on, you know, for me as CEO, putting in things two years in advance of a sales stage process as disciplines into the business that I knew would make our DD process easier was like my number one priority every single week. Whether it's kind of being strategic around what revenue we book where or what capital investments we put into which financial year or, you know, making sure that I often traded day rate against keeping the IP of the business rather than trading the IP over to, you know, a voracious sports club that decided it wants to IP or, you know, making sure we have flexibility in our office lease because if somebody bought us, we had a big office, we could move in with them rather than I was sort of committed to three to five years down the road. Like, you Absolute pain in the backside as a chief exec to focus in that space earlier than the market might've suggested we needed to, but, but ultimately it was, it made us a better business, whether we were going to go into an investment process or not. And, you know, I think so often sports businesses chase the profit number, but we've got to get to a million quid profit because then we'll get a better exit. And, you know, you make sacrifices around things like. The foundations of the business to get there. So you might have a million quid profit, but once DD has a look at it, they'll give you a multiple of eight on it, or you work really hard at the disciplines and structures of business only end up with 900 grand's worth of profit, but you get a multiple of 12 and some of the things we focus on in the run up to investment are completely wrong in my view.
squadcaster-jb32_1_09-19-2024_095916:Yeah, that's, that's very typical. What Matt described is super typical it's super typical for less mature businesses, bigger businesses. tend to have thought about it and worked on it. But small businesses, tremendous amount of preparation needed to get them in, in, in what's called investment ready. A good corporate financier can help with that. They're the estate agent, but they've got maybe a little bit of Sarabini thrown in, you know, to make the house a bit better, you know, ahead of it. And that's also our role when we're involved as well, you know, to think about, you know, the business plan, look at the quality of the revenue streams so that you would much rather take on the type of revenue stream that gives you a reliable year on year investment than a higher one that's a big, a big number now but it's starting again from zero the following year. Things like that, that, that make you both more attractive to an investor, which translates into a higher multiple of your profit, but also just kind of make you a better business.
Richard Gillis, Unofficial Partner:one of the tropes of the sports investment thing is again, this is called other people's money, this podcast. So it's, when you're on the sell side and you're looking back at the investment. side and the money side and whose money is it? Who, what is in a fund? Who is actually buying us is a question that you quite often get. Is that possible to answer in the process that you're going through to penetrate that to the level that you're happy?
squadcaster-jb32_1_09-19-2024_095916:Yeah, it is, it is. I, I don't know if it's as important as The non executive from the investor is going to sit on your board, but it absolutely is some of the most, when I've worked on Bitesize talking with with senior management of that, the private equity company was interested in investing in the most impressive ones are not only on top of the business, but they ask hard questions of the investor because they know that that is going to be a. You know, a very important relationship for them, not only over the next few years, but on the way out as well. So because once you're invested in, you're almost committing yourself to then further transactions in a way. So, If you're a good investee, you will challenge the investors very hard and you will ask them about what's distinctive about them, about how they work with you, about their source of investment, about further investment, if you need it, et cetera and their ability to raise that you can ask them about how long their fund has got to go, because a lot of funds aren't what's called evergreen, they've got a certain lifetime, and if you're invested a few years into that fund and that fund's Got an expected five, six, seven year lifetime. Then, you know, they're going to be starting to look at getting out in two or three years time. And that's important for you to know. So asking those hard questions of the investor. Is, is very important. And you can ask those before you've committed to an investor. So before you're an exclusive and you're doing your roadshows, you're talking to a series of investors and they're looking at you. So you're, you're not only selling, you're interested in who is the right investor for me. And your corporate financier, so highest bid usually wins, but your corporate financier can help you and can help that investor make sure that they're at least matching the highest bid. You know, they can give them a nod about how much they need to be bidding to, to win because you want them to be the investor. So your due diligence on those investors is very important at that stage and you should absolutely do it. And it's better if you do, and you create a better impression if you do.
Richard Gillis, Unofficial Partner:And then are there any sort of obvious mismatches in terms of the type of money that is buying? The only thing, again, it could be just the, the terms of the deal, but again, one of the, one of the questions, and we, we land on private equity a lot because that's, you know, they're doing a bit of investing in sport, but then it's just, I'm always interested in where, if there's any patterns just generically between the type of money, the type of investment, the shape of it, and the property that's being invested in.
squadcaster-jb32_1_09-19-2024_095916:Yeah, yeah, yeah, there are. And a good, a good corporate financier points you towards the right type of investment. for your situation. You know, if you just after selling for the largest amount possible versus, you know, this is the next stage and you just want growth, what's called growth capital. So you're not taking any money off the table. So they're extreme and all the money is going into business. And there might be something in the middle of what you're taking a bit off to de risk yourself a little bit so you can make more rational decisions for your entire wealth isn't on the line every time you make a decision. So a good corporate will point you towards that. The type of investor that. Provides suit that's it's their specialization. And they can also tell you about the nature of. That's investor and the way they operate and their own investors. So some investors are well known in sectors. Some well, some investors are well known for what's called buy and build. So they buy what's called a platform investment, which is a big one. And then they'll, they'll do additional investments on top of that. Some are well known for being good at geographical expansion. Some are good, uh, well known for retiring founders and new management teams coming in. So. You're getting advice. It's not just about type of money. It's also about the nature of the individual who's going to be sitting on your board, making very important decisions with you about your business and where they're coming from and what their experiences. So it is both of those two things.
Richard Gillis, Unofficial Partner:there's a question I've got and it'll probably finish us off, which is if I'm selling, what do I, how do I go about hiding the bad stuff? Are there any tricks that I should know or the, you know, stuff that, stuff that you, you, or things that people have tried in the past that, you know, I'm just trying to get to what the, what the real game is. When you walk in the door and what I'm thinking, if I'm, if I'm looking to get an investment away,
squadcaster-jb32_1_09-19-2024_095916:Yeah well, definitely don't have a mindset of hiding the bad stuff is the first thing. Just
Richard Gillis, Unofficial Partner:that's my first instinct. So it's probably quite revealing.
squadcaster-jb32_1_09-19-2024_095916:it is, it is everybody's instinct. It's everybody's instinct because you're, you're trying to make, put your best foot forward. Uh, you absolutely must know that there'll be someone like me and the financial equivalent, the legal equivalent who've been on buy side and sell side everything about what everybody's done. And the second worst thing is it comes outta the woolwork during the deal. The very worst thing is it comes outta the woolwork After you've done the investment then you're in a whole lot of trouble. So as far as good stuff and bad stuff is concerned, the best that you absolutely need to put your best foot forward. But you, you are much better off emphasizing what is great about the business, what. is the rationale for that. What are the solid numbers around that? And also, what are the things that you're thinking about as scenarios for the future? So if you think something could go wrong, could be a vulnerability you need to be open and frank about that with the corporate financing advisor, and they need to be open and frank about that with Investors, because you don't want to go most of the way down the track and then have to start again because it's, it's much more difficult to get a good deal if you're starting again, the market hears and, and, and they know, and the thing is investors, there are a handful of things that are in common that turn them off deals, but usually that usually because they're human beings, they get put off things that have stung them in the past. And different things have stung different people in the past. So you want to be pointed towards investors that, you know, on those people for your, your equivalent business. You know, if, if you are, I don't know, you are highly reliant on one client, for example, but you've got multiple touch points into that client. That, that is a massive turnoff for lots of investors. And you want to be upfront about that because you don't want to be wasting anybody's time talking with them and focus on the investors that think of that as a great opportunity. So. Be open and upfront and clear. And if you're tempted to hide anything, that's an alarm bell to say, I need to talk with somebody about this, you know, and be as open as I can about it and think about, you know, how we can, how, how we can work on that for the best interests and point towards investors for whom it's not as big a deal.
Matt Rogan:I mean, ultimately you are, you are, you're gonna have a surveyor wander around the house. And at some point the investor is going to say, do I still want this or not? And if it's a blend of do I still want this or not? And actually this chief exec, I'm not far, I can trust them as far as I can throw them. That's not a great place to be. if if you've looked under the bonnet, but feel there's a fundamental trust there between the two of you that you would want to work together. End of the day, people by people. So,
Richard Gillis, Unofficial Partner:and Steve, do you, in terms of, I'm wondering about what keeps you up at night and I'm wondering if it's missing something. are you liable for that? If, if you've been, you know, you're going in and you've missed something significant. Is that the, thing that Eats away at you.
squadcaster-jb32_1_09-19-2024_095916:Yeah, it, it, it, it's missing something it's absolutely absolutely something that definitely keeps me up at night and you could probably tell kept me up last night because I'm working on something right now. And it's also, there can be a couple of things where there's a judgment call and it might go either way. And let's say, you know, it's further business with a big customer, that's pretty chunky and you're either going to get it or you're not. And you're kind of making a judgment call from having talked to them, but they will get it. But none of us can predict the future. So that as well. Now we are, we are liable for not being thorough enough. So for the first one, missing things, we're absolutely liable for that. And the second one where there's a judgment calls, we are open about the fact that it's a judgment call. We say it's our best advice. This could go wrong. This, this we think is potentially a downside. And then the investors going into it with their eyes open, they ask for our recommendation and ask us to what's called a pine to give, give our opinion, but that's all it is. So we're not liable for that sort of stuff. Still gets me working now though.
Richard Gillis, Unofficial Partner:Something, something's got to, isn't it? You know,
squadcaster-jb32_1_09-19-2024_095916:Yeah, I'm a four year old. Yeah.
Richard Gillis, Unofficial Partner:listen, it's fascinating. We could go on. We need you to come back and, uh, talk more. But yeah, thanks, Matt, for setting up. How do you two know each other?
Matt Rogan:Steve was my first boss. It was about being created.
squadcaster-jb32_1_09-19-2024_095916:Yeah, I still, I still remember talking to Matt before we interviewed him for his first job, which is a while ago. I always hate these conversations, it ages me so badly. Yeah, and Blackburn were good.
Richard Gillis, Unofficial Partner:yeah. Halcyon days. Jack Walker. We could have a whole episode on that. Anyway, we'll listen. Thanks a lot Steve for your time, really appreciate it, and thanks Matt as ever.