Lonely at the Top

One of the most common themes I hear when talking to successful business owners is that it is lonely at the top. This was reinforced during one of my recent podcast interviews when I was talking to a founder, Tony Keating, who shared a story about a particularly difficult period in his business. Tony co-founded Resapp, a business that commercialised technology that diagnosed respiratory illnesses via a recording of a patient’s cough. While the business was ultimately acquired by Pfizer in 2022 for $179 million, the journey to get there was a difficult one. 

As he told the story, I was particularly interested in who he turned to for support during that toughest of times. He said his lawyer was great to talk to and his investment bankers too. While I am sure they were great, these are not fields traditionally associated with an empathetic ear and emotional support in times of trouble. I asked if he talked to other founders who had been through a similar situation before. His answer was no, when you are in the middle of running a business and in the heat of battle it’s difficult to develop those types of relationships with your peers. 

I was interested because as our podcast has grown, we have formed great business relationships with our guests - a growing list of exceptional founders and business leaders here in Australia. It’s clear to me that there is a huge wealth of knowledge and experience within our ‘podcast alumni’. I’ve been thinking about how best to bring that group together in a way that is most valuable to them. After talking to a founder who anticipates selling their business for over $100m in the next 12 months about their private investments, I realised what would be most valuable to our podcast guests and our future guests. 

We have the perfect mix of founders who have created and sold huge businesses, as well as founders who are working their way through that process. We also have founders who have decided not to sell and keep their businesses privately owned. That is a rare group opportunity to bring like-minded business owners together. Some who have been there and done it at the highest level and others who are about to. It’s a perfect mix of experience and knowledge to be able to share with those who need such rare advice the most. 

So, the plan for the second half of 2024 is to bring together a small group of 10-15 successful business owners for a private boardroom lunch to discuss the decision-making process around selling or not selling their business. Those that have been there and done it have a wealth of knowledge, real-life examples and tips and traps to share, that you only learn once you’ve been through it. But more than that there is also the transition phase to explore when it comes to the post-exit impact on your life. This is a massively under-researched area and all too often I hear stories of how difficult this phase is for founders.

For example, when a founder sells and suddenly has a large amount of money, what made them an exceptional businessperson is often their biggest weakness as an investor. They want to act fast and move quickly when making investment decisions. But that’s a recipe for disaster. Time and time again I’ve seen people lose millions from their first few investments post-exit before they realise their mistake and put in place more robust decision-making processes. My advice once the money hits your account is simply to put it on term deposit for 3-6 months and just decompress. Then look at your next steps. 

Many of you reading this are exactly who we want to bring together in this type of forum, you either run a very successful business or have sold one. I have started conversations with many of our podcast guests in the past few weeks and the support for the idea is fantastic. Whether you are an existing client, podcast guest or a friend of our firm, we would love to hear your thoughts on how we can build on this concept in the months and years ahead. I would love to hear your feedback and thoughts on this idea. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Succession

One of the best TV shows I’ve seen in a while is Succession. What the show does really well is explore the issues and power dynamic of a very wealthy family and their business. It highlights how difficult navigating succession within a family business can be. There’s an old adage that family business and wealth is made and lost over 3 generations. The basic concept is that once the wealth is made, the next generation maintains it while the third generation squanders it. Often referred to as ‘shirtsleeves to shirtsleeves in 3 generations’ it’s a cautionary tale that conveys the difficulties families face in managing their wealth and financial success over the very long term. The reality is that planning for succession is a serious topic that is too often neglected until it’s too late. The purpose of succession planning is to make sure that the family wealth passes through the generations and continues to grow. 

There are often tensions as the family patriarch or matriarch gets older, and their adult children rise within the business. It’s important to manage that situation because these issues only become more difficult and more complicated to deal with later if there’s no succession plan in place. By the time the founder passes away it’s all too late. It happens all too often, and the subsequent problems can become an emotional, financial, and legal minefield for the whole family. None of these topics are going to be easy to deal with but it is necessary to work through the issues regardless. 

Addressing these challenges requires careful planning, open and honest communication, and a commitment to the long-term success of the business. Sometimes hard conversations are needed. Seeking external expertise, implementing governance structures, and establishing clear processes can help navigate the difficulties associated with succession planning within a large family business. Obviously, it’s important to avoid any unnecessary bureaucracy but at a certain point, a family grows to a size where it benefits from introducing a more formal process for decision-making than they had in the past. Overwhelmingly, I hear from every family that goes through the process, that they wish they’d done it years earlier.

I had a really great conversation on exactly this topic during my podcast recently with Stu Laundy from Laundy Hotels. These days the family have over 90 venues and a business valued at over $1.5 billion. What was fascinating was Stu’s candour with regard to the real-life struggles that exist within his family as they mapped out the succession plan for the next generation. It’s not easy for the older generation to let go of control and change the way they run the business. What Stu and the family realised and ultimately embraced was that it is critical to have those hard discussions as early as possible because once you do you reap the rewards. So many family businesses can learn from these insights.

You’re not going to avoid conflict in a family business, but you can harness the difficult issues and turn them into a constructive process. These cover a range of topics from the family relationship dynamics, balancing various competencies and skill sets, family Interests, through to the emotional attachment of the founder and how to let go. You also need to ensure fairness and equity for all the family members and the need for the business to evolve and adapt to changing markets and technology. The benefits are significant though and help to safeguard the future prosperity of the business. The planning process helps identify the right people for the right roles and not only educates the successors but develops their talent to ensure a smooth transition and a continuation of the founder’s legacy for generations to come.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Why I Started The Dion Guagliardo Podcast

Growing up, I always loved reading stories about successful business leaders. I would devour anything I could about people like Kerry Packer, Richard Branson and Gerry Harvey who were amongst the earliest people I was fascinated with. I would buy books that featured profiles of say 20 entrepreneurs or 100 businesses. I made a habit out of purchasing the BRW Rich List (now the AFR Rich list these days) to learn how successful people made their money. I was particularly intrigued by stories of self-made people and tended to skip over those based on inherited wealth or property. My fascination lay in understanding how great businesses were built and the personality traits and leadership qualities of the people who built them.

One of my favourite lessons was from when Steve Jobs was young. At 12 years olds, Jobs randomly rang Bill Hewlett, the co-founder of Hewlett Packard to ask him for spare computer parts. An amused Hewlett not only gave him the parts but a summer internship in the factory. Years later when Jobs was quizzed as to how he did it, he said, ‘I looked him up in the phone book and made the call’. His big lesson here was that ‘I’ve never found anybody that didn’t want to help me if I asked them for help.’ He also added that most people ‘don’t get those experiences because they never ask.’ It's so easy to make the call, yet almost no one does. The very best do though.

But it’s not only the very wealthiest people that have wisdom to share. There are so many people who have built successful businesses that have a less well-known story but just as much wisdom. I thought, who is telling their stories? How are they sharing their knowledge? These are the types of people I work with and talk to every day and there are many insights to be gained from them. I’ve always found them to be generous with their time and advice. So, I thought interviewing these people on a podcast would be a wonderful way to share these stories. That’s where the Dion Guagliardo Podcast started and why it exists.

My favourite part of talking with my podcast guests is when the conversation is so interesting that you almost forget you’re recording an interview. The conversation flows and you gain insights that were simply different to what you’ve heard before. A couple of months back I interviewed Vu Tran, cofounder of Go1. The business was started by four high school friends from Brisbane in 2015 and since then has grown to a $2 Billion+ tech unicorn. But as Vu explains, that’s just the start. They have very ambitious goals for the company and where they want to take it.

What struck me most during our conversation was Vu’s take on company culture. In the business and corporate world, culture has almost become a cliché. Companies will say how important it is but often fail to articulate what their culture is, and they rarely live up to the talk. Most often, companies will espouse their wonderful culture and why they look for people who will fit their culture. This is what made Vu’s answer so interesting. “We don’t want people to fit our culture” he said almost defiantly “We want people who will enrich and grow our culture.” Interesting. “We don’t want the same culture we have now in 10 years, or we haven’t grown”.

I was always fascinated by the intelligent and considered interviewers, like Andrew Denton and Michael Parkinson who seemed genuinely interested in their guests. They were so good at building rapport. I always remember watching Andrew Denton interview people when I was young and being blown away by the way he used silence or a gentle follow-up question to break down barriers and open up a guest to a whole new level of vulnerability and openness. He not only knew how but he knew when to do it. He understood nuance and subtlety. Not many people can do that, and it really stood out to me.

As I’ve got to know my clients over the years, I have found one of the great privileges to be the lessons and stories you hear about how they made the money that I now manage for them and their family. There is nothing quite like hearing about the early days from a founder starting with nothing who went on to build an empire. But what watching great interviewers taught me was that if you ask the right questions, you’ll find that everyone has an interesting story and unique insights and wisdom to share. There is nothing more interesting than meeting a guest for the first time, hearing their story, and going on the journey of unpacking how they got to where they are today. That’s my rationale. I want to learn from the best people across all fields and I want to help them share their lifetime of hard-won insights for the benefit of everyone. Now 2 years in and approaching our 50th interview, I’d like to think we are achieving that.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Signs of Distress

There are some troubling figures starting to emerge in relation to a jump in bankruptcy, insolvency, and mortgage stress. These areas have all spiked recently as the covid era business protections are removed and markets are left to function more normally. Keep in mind that these figures are coming off a low base, but it signals a new phase for the economy. Here in Australia according to the latest insolvency statistics from ASIC (Jul 2023), insolvency rates are climbing sharply now too. During covid, insolvencies were in the 4,000-5,000 range annually. In the last 12 months, this figure has increased substantially and is now in the 8,000 to 9,000 range with 866 businesses being wound up in May alone. This is emerging across the world with places such as the UK particularly severe. The key concern is the flow-on effect through the economy. Increased bankruptcy means less jobs and less money being spent by both consumers and businesses in the economy. It snowballs from there.

At the same time, here in Australia, we are starting to see a spike in borrowers in mortgage stress. According to Roy Morgan research, over 1.4 million Australian borrowers are facing mortgage stress, up 78% from a year ago. The figure means almost 30% of all mortgage holders are in mortgage stress, which is the highest rate since the GFC. The most troubling aspect of these figures is that they’re at these alarming levels despite the economy not being in a recession and at a time of record low unemployment. If we see the unemployment rate materially rise in the months ahead, which I believe we will, these figures spike even higher. With so many people already struggling now while most people have a job, imagine the economic carnage when the unemployment rate rises. Mortgage stress means consumers have less money to spend on everything else. It slows economic growth, and it becomes a vicious cycle leading to more insolvency, less jobs, less spending and so on.

The added issue with mortgage stress for the property market becomes forced selling. It’s been a long time since we have had a situation like that with property, but I think it’s now a possibility. Distressed property owners selling drives prices down fast. Even during the GFC here in Australia, we didn’t really experience property issues in the same way the USA did. You really need to go back to the early 1990s since we’ve seen a scenario like that. It’s simple supply and demand. When you get distressed sellers, a glut of properties form and supply becomes greater than demand. The prices start to fall to meet demand. As people become more desperate prices fall even faster. Compounding this issue is the fact that buyers realise if they wait, prices will go even lower. So then demand starts to dry up and the situation becomes even worse. I’m not saying that will definitely happen, just that it could occur in this cycle. It’s on my radar and it hasn’t been before.

When we start comparing statistics to the GFC era, you need to keep in mind that in many cases we are talking about the maximum pain points that peaked at the end of the GFC in 2009. What came with that was a whole range of government stimulus and borrowing that was designed to make the upfront pain easier in order to spread out the pain over time. But we never stopped making things easier. Now, we’ve created inflation and as the economy gets worse, there isn’t a lot the government can do to help. Businesses, consumers, and families are going to have to wear the pain. Governments will lower interest rates, but we have the spectre of inflation hanging over us now so governments will be hamstrung with the policy moves they can make. So, while the GFC was bad, it wasn’t as bad as it was meant to be. Governments kicked the can down the road. We are getting closer to the end of that road.

The convergence of these variables doesn’t happen very often, but we have all the requirements for these once-in-a-generation scenarios forming in the background in this economy. It’s one of those things that when you say it, people think you’re crazy, but then when it happens, those same people will say it was obvious. Now interest rates may well still be low historically, especially compared to the 1990’s but it’s all relative. Someone borrowing as much as they can at 3% is going to be in trouble when their rates double to 6% or worse. As slow as the downturn has been to arrive once it is here it will be a problem for the whole economy and all asset classes. We’ve already had a false start in 2022 and since then everyone wants to pretend the worst is behind us. Diversify, be patient and be prepared. You don’t have time to position for it later. The time to position for the bad is when it’s still good. It’s too late to batten down the hatches once the storm hits.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Setting Up a New Portfolio

As I speak to our clients and podcast guests, I continue to see extraordinary business owners who are fantastic at running their business but who’ve never managed investments before. It’s a completely different ball game and it can be daunting. You need to learn, but who do you learn from? When you don’t know how to do something the most difficult part is working out who does. I strongly recommend reading books by the very best in the world. But even then, investment philosophies vary so greatly that what works for one investor doesn’t necessarily work for another.

The first rule is to keep it simple. If you’ve been successful in business, you know how to bring information together and make decisions based on what makes the most sense. So, keeping it simple means only doing what makes sense to you. Importantly, it means don’t make investments you don’t fully understand because you think the person telling you to do it knows better. No one cares about your money more than you do. So, it’s critical to understand the investment and the rationale behind the advice. Sayings like ‘If it sounds too good to be true it probably is’ might be a cliche but are also true.

Those that sell their business suddenly have a large amount of capital to invest. Ironically, while that kind of generational wealth brings with it security, it also brings a high level of anxiety. Founders are suddenly confronted with the prospect of not only making investment decisions they often haven’t had to make before, but they are also acutely aware that in many cases this money, regardless of how much it is, is all they have. It’s a very different mindset when you transition from a business owner making millions of dollars a year in profits to an investor where the amount you’re investing is the amount you have for the rest of your life.

Whether you have $10m, $100m or $1b to invest, the process is very similar, especially in such volatile times. In these situations, invest slowly over time. Regardless of how great the investment opportunities are or how great they seem, take your time, and invest progressively. This is simple but an important part of mitigating the risk of markets falling substantially after you invest. Of course, it can work the other way too and markets can jump up but in the current situation, there is more risk to the downside than the upside. But when you are setting up your family for generations, taking months or even years to fully invest protects the downside while ensuring you have funds available for opportunities that may arise in unique situations.

From there it’s a matter of structuring your investment portfolio for the long term. Rule number 2 is to diversify your risk. Diversification across asset classes such as property, shares, bonds, and cash are critical. But so too are the underlying investments within each of these sectors. Spread your risk because when one asset class performs poorly, you expect the others to have performed well and offset your losses. While diversification within an asset class is similar, if you hold 20 stocks and you have a couple of poor performers, you’d expect the good performers to mitigate this. At its most basic level, it ensures that if an investment fails you don’t have too much of your portfolio in any one asset.

So, keep it simple and ensure that you understand the investments you make. Don’t make an investment because everyone else seems to be doing great investing in it. This is the dumbest reason to invest, and I’ve seen more people lose money from investing in these ways than anything else. Diversify, across asset classes and then further in specific investments within those asset classes. Average in over time to hedge your timing risk, especially when investment markets are uncertain and overvalued. 

Lastly, you need to be able to sleep at night. That is the final test, can you sleep at night with the investments you have? If you can’t then it’s either because you don’t understand your investment properly or you’ve taken too much risk. Always make sure your investments pass the sleep test.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Earn-Out Phase

Over the years as I speak with clients and more recently, the business owners I have interviewed on my podcast, it is clear one aspect of selling a business is tougher than most would expect. Specifically, the transition phase whereby the founders complete their ‘earn-out’. When a business is sold, there are usually 3 components made as payment, cash, stock and an earn-out. The cash is the amount of the business you sell for dollars in the bank. The stock is the shares in the new entity you receive, often a much bigger listed company. The earn-out phase is a period after the business is sold, after which the seller receives additional payments in exchange for assisting with the transition of the business to the new ownership. Typically lasting up to three years, the earn-out phase incentivises the seller to work towards agreed-upon objectives and performance targets being met to earn a bonus payment.  

The earn-out is an extremely important part of the deal but is sometimes overlooked or at the very least not given the level of consideration by founders as it warrants. After the initial excitement of being acquired for millions, reality soon hits because how the earnout phase is set up and who you have sold the business to is going to impact your life in a big way for the next three years. While many people are willing to endure discomfort for three years when a large cheque is on the table, it is worth taking the time to plan and negotiate the earn-out terms. It is especially important to consider how the next few years may play out if things don’t go well. It could be because of targets being missed, personality clashes or simply tough economic times but you’ve got to consider the downsides. 

The comment I hear the most is that you lose two things that are more important to entrepreneurs than anyone else, autonomy, and time. So be aware that you have handed over ‘your baby’ and you are not in control of the decisions anymore. Other people are in charge and they will not run the business the same way you did. Your business will be part of a larger organisation with a hierarchy that slows everything down. No longer can you decide on a marketing campaign in an afternoon based on your gut instincts based on 20 years of business. Now those are group decisions that must go by the head of marketing for approval. But they will need to run it by legal for approval and so on. Be aware that is just how it will work going forward.  

The reality is that you’re going to experience significant change in the transition phase. More so than anyone else in the business. The greater the percentage of the business you retain, the more important it will be for you to have a level of control. Most importantly you need to prepare yourself psychologically that the business is no longer yours. The new owners will probably drive you insane at times and make decisions that make no sense to you at all. So, you need to be mentally prepared for this because they may very well take your years of blood, sweat, and tears and mess it all up. It might turn out great too and everyone will live happily ever after, but do not underestimate the earn-out phase and the impact it will have on your life for those few years.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.