Ep14: How To Secure Two Pay-Days Using Growth Equity

Want to plan for a lucrative exit in the next 5 years? Learn in this episode what having a strategic growth capital partner can do for you to help you optimise your exit options and outcomes with Mark Bryan from Pemba Capital.

How do I accelerate my growth trajectory? Should I take on a capital partner? If so, who would I choose and why? How can they help me? Do they take full control of my business? Help!

Learn all about what a growth-equity investor does in this illuminating episode with Mark Bryan from Pemba Capital.  For those who’ve not been exposed to a strategic capital partner you’ll find it a super insightful look into one the ways you can seek some external help to speed up your potential exit be that a trade sale, IPO or alternative without losing control of your business.

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[00:00:28] Sean: G’day everyone, Sean from the ScaleUps Podcast, just letting you know that today in the Mark Bryan interview, about 20 minutes in, something when awry with my camera. And so, there's a couple of minutes there where you've got some funky video, but all of the audio works perfectly fine. And the video kicks back in again. So, please bear with me. Enjoy. G’day, everyone. And welcome to the ScaleUps Podcast. I'm your host, Sean Steele. And this is the podcast where we help first-time Founders learn the secrets of scaling so they can fundamentally fulfill the potential of their businesses, make big decisions with greater confidence, and of course maximise the value and impact they can create in the world. I'm joined today by Mark Bryan, Director of the accelerate team at Pemba Capital Partners. How you doing, Mark?

[00:01:08] Mark: Great. Thanks, Sean. Thanks for having me on the show, really pleased to be.

[00:01:12] Sean: No, it's my pleasure. And I always love a referral. And as I think I said to you, when we first met, good people always know good people. And I know we were introduced by a good friend of the podcast who we've interviewed, not that long ago, Steve Grace, who'd had successfully scale these company from two mil to 45 mil. And then started the Nudge Group, which is disrupting a start-up recruitment. And when I asked him for people that he knew that had good experience around capital rising and exits and equity valuation, and IPO's, and you are the first name that came up. So, you know, you and I have had a bit of a chat of course offline and from our discussions to date, I couldn't agree more. For those who don't know about your background, maybe if I can just offer a few quick insights for people. You've been in this space for 20 years now, which is showing your age and mine. And one of the things I think really catch people's interest is you've had a lot of experience in the IPO process, which of course many Founders put on a pedestal as something that they might like to consider or shoot for and that includes the IPL of MYOB, of Elmo, of Whisper, of Ready Tech. And these are brands people will know and see in the papers, but you've also worked with a lot of Founders and CEOs and CFOs to help them achieve the exit they wanted, which may have nothing to do with an IPO. It might be some other kind of two payday model, which I know is some language that you used, but I'll be keen to unpack with you. And prior to that, you'd been heading up equities research teams. And the thing I like about that is you spent all this time from very different perspectives, looking at the ingredients of what it actually takes to scale, but also to create good optionality for exits, which of course many Founders may not know what kind of exit they want, but they came for optionality and they came to have as many options as they can, so they can choose whether they want to step back and stay involved or actually exit completely. But the last, you’re meeting with Pemba Capital Partners now for the last year and a half, is that right?  

[00:03:18] Mark: That’s right, yeah. It’s starting to touch upon 18-months,that’s right.

[00:03:21] Sean: Okay. And can you maybe just give us a quick intro to Pemba Capital Partners in terms of the key clients that you guys are focused on and just the sort of the nature and orientation of Pemba?  

[00:03:31] Mark: Absolutely. Delighted to. So, Pemba itself is actually been established for just over 20 years within the market. Pemba is a growth-based investor. You'll see from a lot of marketing materials on our website, you'll see lots of pictures of mountains and Sherpas. And Pemba itself is a commonly used name for Nepalese Sherpa. And that's very much that really goes to the heart and DNA of how we see ourselves, which is very much the support group. So, we're a partner investor. We always refer to companies as partner companies and we're very much a non-intrusive team as well. So, we're there to provide support to help shine the light, but it's really the management and the Founders summit that they want to get to. We're sector focused, so we focus across five key sectors; technology, education, non-bank financial services, healthcare and business services. And we've done over 200 partner investments over those two decades. And particularly in the last few years, partly because of the change in the Australian economy and without a lot in the technology space. So, we've done two and a half times more mid-market technology deals than any other growth-based investors. So, it's an area that we really enjoy playing in.

[00:04:56] Sean: Even just listening to those numbers. So, 200 deals over 20 years, 10 deals a year is pretty much one a month, which suggests that … for some people might sound like a huge number and some people maybe not as much, but when you just think about their level of experience, that and knowledge that's built across the team of Pemba, that's pretty extensive.

[00:05:15] Mark: That's right. There is a lot of domain expertise within the business, probably to dig into that a little bit more. We have three core teams within the business and where we're quite unusual in the sense that we tend to originate around about 80% of our partner deals directly with Founders. So rather than relying on advisors for introductions we're actually actively out in market.

So, what we've done in recent years is we've screened the market across those five sectors that I spoke about and we've gone one step further. We've looked at the sub sectors and the niches within those sectors and identified and mapped the areas that we want to really partner with companies. And then we'll go out to market via our dedicated origination team speaking to a lot of Founders, lot of company directors and work out really which are the companies within those niches and areas that we want to deploy capital into that are there and interested in a partnership. We then have a dedicated transaction that works with those companies to go through the transaction. And then finally we have the team that I look after, which is our accelerate team and our accelerate team has been established for really three value propositions for the partner companies. Another one is to help them drive a buy and build strategy, so help them look and identify what would be really good businesses for them to partner with and bring those into, to what we call the platform. So apart from scaling organically, we can also scale through the addition of other businesses into the mix. Secondly, we'll typically sit on the boards with management and help provide them with strategic and operational insights. And then third and ultimately, we help them prepare for a lucrative and premium exit which to your point earlier, it could be a number of options as number of routes to that. It may well be IPO as we have done. That could also be a trade buyer or indeed it could be a sale to a private equity player with a slightly different focus.  

[00:07:20] Sean: Yep. Okay. Got it. So, the three teams are really splitting up responsibilities to make sure that we find the deals, we get the deals done, but then your team is really charged with the… I always think this is a interesting throwing something over the fence. I'm sure it doesn't happen that way, but it's like everyone's got an expectation of everybody else, but you guys get the expectations like okay great, we've got this thing, now you actually really have to put the fire under it. So, that's a pretty interesting challenge for you. Well, one of the things, I guess today, obviously I've invited you here to talk to our community of Founders, who many of them are first time Founders and many are still in two mil to 10 mil or 15 mil revenue range. And so haven't scaled their businesses, scaled a business, or maybe even operated in a business that's larger than that in size before. And so, they're thinking that quite often. These are businesses usually that are going very well. They're not usually coming to us because the business is broken. They're coming to us because they're looking for ways to navigate through inevitable challenges, learn about the things that they don't know yet, think about what might be those exit ops. Should I be taking on capital? Should I even be thinking about that what kind of exits are available to me? How do I optimise that financial outcome? Are there points in time where I should take my chips off the table? What if I want to stay involved? What if I don't want to stay involved? You know, all of these sort of strategic questions that they of course start thinking about, and seems to typically happen around… If it's a single Founder, might be around that sort of 30 person stage where they're starting to build some management in sort of early stages, but probably also getting a little bit tired because they're probably still doing a lot and thinking about what those next ideas are. So, I'm really interested to draw out today some of those key things that you think from everything that you've seen, things that you think Founders should really be focused on in order to achieve scale. And I guess one place I'd like to start is maybe if you can actually just take us back to the start of your career before we jumped straight into those. How did you end-up in the capital markets in the first place, like what was your sort of career path together?  

[00:09:22] Mark: Yeah. It’s a good question. As you said, it does take us back a little while. I've always had from a very young age as a teenager a real passion and interest in markets generally. It was a time when markets were being deregulated and there was a lot of excitement and media coverage around markets career generally. And I found myself, I studied economics at university. I found myself in a fortunate position to join an investment bank on a graduate program. And it was in the late 90’s, 1997-98. And that was obviously a time when the tech bubble was just beginning. The first tech bubble was just beginning to really take off and expand. And, I fortunately found myself in a position where I could join an equity research team focusing on at the time, UK technology, which quickly expanded to European technology. And then over time took on much more of a global mandate. So, I spent the first 12 years of my career in London with two large investment banks, they've been AMRO and Deutsche Bank and much of that time was focused on providing investment insights into software and services company. So, I think it's really a combination of the two. It was an avid interest in technology, coupled with a real passion for the markets.  

[00:10:42] Sean: Yeah. I love that. Okay. So, some very interesting grounding that got you to here and then given everything that you've done from them…sorry, since then, when you think about those and I think it's always a really challenging process to go when somebody; can you crystallise your 20 years of experience into three or four things, you may not be able to capture of course, all of those, and also without them becoming too generic. But, what are some of those things that spring to mind for you? What's the first thing that you'd like to offer as kind of above all else, something that you really need to think about as a Founder is what?  

[00:11:17] Mark: I think the Founders of what I've seen in businesses, both; large, larger listed businesses on the stock markets and also smaller private businesses that are going up through a much, much faster growth scale. It really comes down to the organisational structure that you build into the business and getting particularly the right people in those seats. And particularly for your audience and the businesses that are going through the scale-up process, I think you really got to try to think about what the org structure needs to look like in three years from now, and actually start building it at this point. And that's not always easy because a lot of Founders are bootstrapping their operations and they may not necessarily have either the capital at this point, or the P&L structure to be able to make those investments. But the more that you can think about doing that, the better at this stage, because you naturally then move into that growth phase. We made a lot of businesses that tend to say, for example, under invest in the finance function. And that's okay when we meet them and we partner with them because that's something that we work with them very quickly at the outset to address. And one of the early hires we often make as a really well credentialed Chief Financial Officer, and that really helps the Founders set some cadence in the business, around the budget process, how to report to the board and then getting structure into the contracts they're signing, making sure that they're optimised, that the pricing is optimised and that then ultimately ends up helping really drive the P&L growth of the business. So, I think it's a case of setting a really strong strategy in terms of the org structure and then not being afraid to make those investments and really look to bring in the talent around you.  

[00:13:10] Sean: And I guess that's one of the reasons why sometimes people might think about taking on a capital partner at that stage. Probably, they know that they need to start really hiring some good strength in there. On the one hand, if they're looking to bootstrap this themselves, they going, well, the best I can afford is this. And that person may never have actually been to that next stage. So, it doesn't necessarily, might be a great cultural fit and able to contribute some value at the level of role that they come in at, but that doesn't mean that they know that they can walk in on day one and go, well, I know where it is that we're trying to go and let's chart a path to get there because they actually might not be able to afford the person who can bring that wisdom.  

[00:13:51] Mark: Yeah. I think that's right. The decision point as to when you take capital is not an easy one. But what I would say, it's about the right partner, I think is really important. Capital itself has become far more freely available over the last few years and that's in part a reflection of what's happened to the economy in general. And actually, in many regards COVID has increased that, that capital because in order to keep the economies afloat, globally all governments have flush the system with lots of liquidity. So, there's an awful lot of capital out there looking for a home. But the key is getting the right, the right partner that can potentially help you build out that structure within the business. But I think you absolutely should always be shooting for the best and trying to get those right skills in place. It's an interesting, I think a mentor of mine once told me that you should really dedicate within business much more of your time with your top performers and get them growing more than actually your under-performance, because you'll spend so much time with your under performers, that it will distract you from the work you're doing with your top performers. And I think the same is true when you're setting an org structure, make that incremental investment to align with partners or talent within the business that have already gone through that journey, and you'll find that there is a much, much easier path. Naturally, how can you expect some people that haven't gone through that journey already to necessarily understand the point that you want to get to. So, the more that the Founder can free themselves up to be working on the business and not in the business, getting caught up in the detail and actually thinking in a forward thinking fashion and getting the strategy really moving quickly the better, and that again goes to that talent investment and making those decisions at the outset.  

[00:15:40] Sean: It sounds so simple, yet it's such a big challenge for Founders because most people will say, well, you know everyone will say that, including all the successful Founders, as well as the experts, you've got to get the right team. And so, it almost can start to sort of wash pass people. It's like, yeah, yeah, I know, I've got to get the right team, but I can't afford that person yet. You've mentioned that actually one of the team members that you typically start with is the quality of the finance function. A few examples you gave were, making sure the business planning and the cadence and the rhythm and good quality contracts and price optimisation and therefore probably profit optimisation.

Let's assume that, I've invested, I've got a good finance leader. Do you naturally go to a next role first? Do you kind of go, okay, we've got finance, I'm comfortable with that. Do you then naturally go for sales or is there another sort of space that you tend to… how do you think about who would you next recommend? And I'm sure it's different for every business, but one of the questions you might ask yourself that would help you figure out if you're a Founder, where should I put those dollars next?  

[00:16:45] Mark: Yeah, I think you're right. It does depend on each business. And obviously in order to fund these, let’s call them talent acquisitions. You need to have a strong and growing revenue line. And so, one of the most powerful areas investment, we often see is around the sales and marketing side. That's where…again, we meet the number of times that have got great products, great services, and we can see how we can drive up that growth even more with some investment in sales and marketing. So, getting the go-to market right, I think is equally as important. Yeah, as I said, we tend to prioritise finance function, but that's not necessarily in isolation, we'll tend to do it as a suite of investments and improvements in the business and definitely go to market as one of those. The other tip, I guess I'd highlight is getting the messaging to the market right and to your customers right. So, we help a lot of companies really improve let's lay their elevator speech so that we get the branding and the messaging really succinctly clear what the value proposition is for the business. You'd be surprised how many Founders you meet that have really good businesses, great businesses, actually, that struggle to enunciate exactly what that business does in a really succinct short fashion. And so, getting that messaging is right as well. So, we will often partner with specific brand agencies and messaging experts to help Founders just hone their message. So, it's across that org structure, really finance is important, absolutely. Go to market is important. And then in due course, there'll be other areas of a say Chief Commercial Officer and CTO that these are all really important parts of the business, but it's sometimes a case of having to just prioritise which ones you need the outset.

[00:18:45] Sean: Yeah, that's super interesting. And I would agree with you, there are, I mean, actually fundamentally one of the main reasons this podcast was created in the first place is one of the things that frustrates me the most having worked with all sorts of Founders and general managers and CEOs for a long time is seeing businesses with great products and services that actually are probably the best in the market at what they do, but they out customer acquisitioned, out business by their competitors who are actually better at sales and marketing, better at customer acquisition, get market share better, better messaging. The product might not be as good, but actually they fundamentally better at the game of business of business if you like. And they're the ones that get pole position. And I find that so… It just kills me to see founders with these great products and services, and they quite often come from…founders who've come from an industry and they've seen the problems or they've gone at solve the problem with a great product or service offering, but just don't have the background in sales and marketing, or if, because usually if they come from a sales marketing background, they're really good at finding the customers, but they might actually lack instead of solving the problem in a really unique way. Sometimes their retention doesn't work out quite as well or their relationship building with customers isn’t as good.  

[00:19:58] Mark: Absolutely. And that, again goes to the capital part, Sean, as well as it's not an inexpensive investment to get sales and marketing right. But we often really try and see our company's spending a significant proportion of revenue on sales and marketing to really stimulate that growth. So yeah, it's a big decision to make that, but it does definitely pay dividends. There's also… and that goes again to the point on finance, as well as you have to make sure that you analytic analytics are strong enough to make sure that you are acquiring customers in a profitable way. And so, you can increase your operating expenses, and that's okay, that's fine, as long as you're acquiring profitable customers.  

[00:20:42] Sean: Yep. Sorry, I've just lost my camera then. We'll get that happening back again as we go. Mark, one of the other questions I've got for you in that space is, are you finding that at the stage that you, if you got a fast growing customer client opportunity for a partner company. And they want to grow faster that the natural inclination is to just take on more types of customers and sometimes sort of lose that focus on a really key customer, and as a result, start to become a bit too generic, margins sort of start to diminish, they’re trying to do too many things at once. And you have to bring them back instead of actually help them understand that can achieve scale probably faster by getting clearer about the really key customer type or the really key problem they're trying to solve rather than allowing themselves to get pushed with our kind of growth mandate to actually to get too broad. Do you find that's an issue?  

[00:21:35] Mark: I think you definitely have to stay loyal to what you're really good at and what you're really strong at. And you can end up spreading yourself too thinly. And I think that, it's absolutely important to sort of ensure that core engine of growth is a really strong one. Having said that one of the key value-adds that we look a lot at is the cross selling. And so, we will often through our buy and build strategies where we might over a period of three or four years, end up potentially bringing in four or five other partner companies into the business that all makes strategic sense, that then provides a significant opportunity for cross sell as well. So, I think it's a blend of the both. Sean, it's ensuring that you're sticking to the knitting and delivering and ensuring that you're getting really good customer referrals. But at the same point when the time is right, then you look at more of those land and expand type strategies as well.  

[00:22:32] Sean: So, Mike, we've talked a bit about the people side and that one of those key enablers that you really got to get right, is getting that quality of team that's going to be able to get you to that next stage. What next comes to mind for you in terms of things that Founders need to focus on?  

[00:22:47] Mark: I think it's part of that and possibly that can do this at the time when they think about taking capital is linked a little bit in with the people structures is ensuring alignment with their employees and with their staff, ensuring that there's incentives for those stakeholders continue to drive the business. So that's maybe when they start thinking about how they're managing the equity plans in the business, that's something that we, again, always help with when we take on board a partner relationship. And so that goes to ensuring that the key personnel in the business or equity incentivised to try and drive the growth. So, what we tend to do when we make an investment is we might, um, bring on board two or three of the key staff members that are going to be the next generation of talent. So, you're building both in succession to the business, but you're also incentivising the staff to continue to want to drive the business going forward.

[00:23:47] Sean: Can you give us an example of Mike, because I know this is a conversation that I end up in regularly around, what should that incentive look like? And of course there's a myriad of options. Could you maybe give us an example of one that you've seen be effective with the client?  

[00:24:01] Mark: Yeah, for sure. I mean, we will typically, when we partner with a company, we will have the Founder retain a very large percentage of the business so they continue to be very incentivised. You touched on earlier that the concept of a first and a second pay day. And so that's a really great structure in the sense that that enables the Founder at the outset of the partnership to take some cash to take some payment for the business today. And that might enable them depends on where their personal circumstances are, but that may enable them to retire some debt or pay off school fees, whatever that is that is important to them. So, the Founder then continues to be incentivised, but has the opportunity over the midterm to crystallise a very powerful second payday when that business ultimately goes through exit. But in addition to the Founder, because as we said, right at the outset, if you're building that organisational structure, you need to have a handful of really strong people around you as well. That's the opportunity to bring on board that hand for the people into the equity as well. And that might be a direct equity at the outset, or it could potentially be performance related equity dependent on hitting certain targets in the business. So, there's very various streams or different approaches you can take. But it is important. I think, to have that alignment with the core management team as well.  

[00:25:33] Sean: And does that typically… I know a lot of people are concerned when they think about starting to add in other equity holders. Quite often there's a concern around tax consequences for the person who's receiving that equity stake. Can you just talk to that for a moment? I know some people are, you know, whether it's options that they're getting or that they're finding or using some phantom equity scheme to navigate around the potential tax implications for individuals who might be receiving a couple of percent or something along the journey?

[00:26:02] Mark: Yeah, for sure. So, we tend to have ours as a very small, quite selective group, is the first thing to say. And I think that's important because that really provides sort of a concentration of where the equity is. Obviously, you see a lot that gets spread over very much across the organisation and I'm sure that works for some companies, but certainly on our partner deals, we tend to keep that relatively well clustered. Our deals are structured so that the taxation implications are upon X of the investment, not at the outset, and so that has worked quite well for the employees so that they're not facing tax charges at the outset.  

[00:26:49] Sean: I think that's important for many, it makes a lot of sense. I always think, when they say; well, who should I be incentivising? And it's like, well, who's going to be driving the growth, who is fundamentally critical to your ability to scale it? Yeah. Those are the people that really need to be on the journey. And usually have they know they have the talent and the capability that can make an impact. And therefore, usually expect some remuneration in that regard anyway, because they're coming in with that mindset. When you think about other key things that you really would like to see Founders focus on what would be next?  

[00:27:24] Mark: I think optimisation across the business is important. What do I mean by that? That's really breaking down the business looking at the product offering, ensuring that that's an engineering product. And then really thinking smart and cleverly as to whether that's being priced at the right level and where you can do, trying to build as much visibility into the business as possible, by which I mean, pivoting those one-off sales into more recurring revenue type nature of sale. So, more subscription-based pricing in as much as you can do. May be a great example of that is we've had one partner company within the business over the last few years that has very strong software offering that is sold on a subscription-basis. In addition to the software offering, a number of their clients were also taking a hardware offering as well. And so, we've really over the last two years, we've pivoted that business so that rather than selling those hardware sales on a one-off basis, we've rolled those into blended subscription deals. So that increases both the recurring revenues of the group, which has the added benefit. Once you have more forecasts confidence, then you can make investments, you can drive up your sales and marketing that grows more sales. And so, you get the virtuous circle coming through which is very helpful in that regard. And building as much forecast visibility into the group, I think is a really good part of that optimisation structure.

[00:29:04] Sean: And do you see that essentially directly turn into value? So, is that part of the discussion when you're talking with a Founder who’s only have run a transactional model for probably some period of time to say, actually, when you think about how an investor is going to be looking at your business or a trade sale or to a strategic. They're going to be looking at the full visibility of this and wondering how much they can count on. And to the extent they can count on more revenues in the future. And they've got greater certainty to that extent the valuation in crisis, is that how you would sort of explain that to them?  

[00:29:36] Mark: That's exactly right. And that's what you're trying to achieve in these is that you drive your valuation multiples up really firstly, through scale. So, building a broader size business is really helpful. We've typically found that once you start getting over 10 million of it and that's when you really start appealing to a much broader base of potential buyers. So, that scale is important. And then secondly, to the point you're making is the forecast visibility that is really helpful. And a buyer will always be willing to pay a higher multiple for a revenue stream that they have a lot of confidence in as well, and just the collection of the revenues drive publicity about it, invest in the cash flows, then spin out from that. So, it just makes for a much, much more attractive business. It also enables the Founders and the management team to think about moving into other agencies as well. If they've got the core business performing really well in generating good visible cash flows, they can use that cash flow for reinvestment into other areas and the business over time then just becomes significantly more powerful and you get more and more touch points into your clients as well so the stickiness of the revenues will increases.  

[00:30:56] Sean: Yeah, that makes a lot of sense. And what about when you're thinking about your strategy, so that you've just taken on a partner company, you believe in it, you think you can add value to it you can see a strong sort of path to exit. How important is it that you've identified what the exit is going to look like at the outset and how much does that influence the strategy that tends to, I guess, the execution plan and the strategy to get there?  

[00:31:20] Mark: Right. So, in the run-up to a partner investment, we will through our investment process run significant number of workshops with the Founders. We will often take external due diligence and leveraged some of the best consultants in the market on the industry to really ensure that we get under the skin of that industry and understand it inside out. And even before we've made an investment, we would have always identified the potential exit routes that we can potentially go through over the midterm. You ideally want to be in order to try to maximise your opportunities. You want to ideally be seeing multiple potential buyers of the business, and that as I just said earlier, can be protection to IPO through a trade sale to a larger player, possibly an offshore player, for example, that wants entry into the Australian market. And then thirdly, potentially into a private equity player that may play in the mid to upper market. So, our expertise is around the small to mid-market building businesses, and then potentially exiting them to either trade private equity or through IPO, but it is important to succinct about that exit. Something we always look to do is, we look to try and see what the largest players in the market globally are doing in that space. What is best practice, and that will often feature quite heavily in our strategic plans for the business as well, and you can get a lot of tips and understanding as to where the strategy can go from that perspective.

[00:32:59] Sean: Got it. It makes a lot of sense.  

[00:33:00] Mark: So, you start to answer the question, you start planning for the exit, right from the outset. And then an exit process will often take a good year once you've actually pushed the button, and you've decided that the business is ready for exit. It will take a good year of preparation and moving towards that period.

[00:33:19] Sean: And when you think about setting Founder expectations around what does an exit look like for them, now, some people know that they want to continue to be involved. They just don't want to be as hands on and operational anymore. Some might be thinking they'll just want to sort of like the hands of it. They will have done enough by then. And then it came to just do something else. So, I don't know how many people go on holidays or whatever it is. How do you talk to Founders and what is your experience of what they think they want to do when they get to the stage of a transaction being completed? Do you find that more of them want to stay on the board, more of them want to stay involved, more of them want to get out completely. And what's the implication for how you guide their expectations, knowing that the incoming purchaser is going to have their expectations of actually how long they want that Founder to hang around, and I guess, protect their investment in some kind of handover. Can you just talk a little bit about how that that piece plays out?  

[00:34:16] Mark: Yeah. Good, good question. And actually, what I do is I pivot to the other way and I'll actually say; well, we do right at the outset is we find out really what it is that's driving the Founder, what ambitions they have and what they see as their summit. And you might, for example, have a Founder that absolutely wants to, as we did in the case of our partnership with a business called Ready Teach, absolutely wants to get that business to be listed on the ASX. And that's their, one of their key career in life ambitions, and that's great in that regard. And we will basically then work the strategy in and around that you may have other Founders that want to just to two years. And then as you said, move more into the backdrop and potentially become a board member. Or indeed, we may have others from a succession perspective wants to step out of the business entirely. So, effectively, everything is emanating from what the Founder wants when you have a partnership with Pemba. And then we will then structure around that. If to your point, the Founder is in the near term, wanting to potentially step back and take a bit of time out, then that's really important. Therefore, that we build a succession into the business because any buyer naturally is going to want to have longevity of service when they take on the business as well. They're going to want to understand that the key managers in the business is still there for their journey as well. We were typically, as I said, in the five sectors we're operating and they're all very headcount, people, head count businesses, I should. And so, with that in mind that the managers and the Founders are really important. So, it really comes down to what the ambitions are of the Founders, and then we will then work out a strategy around that helps them achieve that.

[00:36:08] Sean: Okay. And so, if I'm a Founder and I'm in the process of scaling up and I seem like I'm doing a good job, my revenue earnings are growing year on year. Let's say, you know, we're got a nice strong growth rate and we're sort of on a 30, 40% year on year, both top and bottom line, everything's going well, we've bootstrapped that all ourselves, we're just finding everything out of cashflow. Is there a reason that I should take on a capital partner? Like how, if I'm that Founder and I'm thinking, do I need a capital partner? Should I be taking on a strategic partner? What questions would you have that person ask themselves to see whether it is because it's probably not right for everybody, but who would it be right for? Like what questions should they be asking themselves that would help them identify whether they would really benefit?  

[00:36:50] Mark: Yeah, I think that's right. I think ultimately again, if I look for that, it's not always easy looking forward to this, but if they look forward over the next three to five years, are they going to get to a point in the business where they're comfortable with that current trajectory, or do they want to speed that up? Are they asking themselves what the succession is for the business? There's a lot of family run businesses in Australia that was set up by the baby boomers, and potentially their children are not wanting to come into the business. So, they're running into succession issues. And what's the legacy want to be? What do they leave? Is it really important that they have business with their nine on it, that's really high profile, these are all things that they should think about and should consider. To your point, it's not for everybody, and a lot of businesses frankly don't need to take capital. They can continue to grow as they are, but that opportunity, not just taking the capital because that's more of a commodity, as we talked about earlier, it's about that partnership, working with like-minded people that can really help you drive the business, provides you with support and insights that you might not otherwise get. But it really does ultimately come down to what the Founder wants to achieve over the next 5-10 years.

[00:38:12] Sean: What do you find… I mean, it's a great statement because one of the things I know that Founders wrestle with, when they're thinking about, should I take on a capital partner, they might go, you know what I know, I don't know everything. And so, I know I could get access to people who might know a bit more than me about how to grow this thing faster. However, I'm a bit nervous about giving up any control. I've run my hundred percent shareholder. I've run this thing. I get to make all my own decisions. No one tells me what to do. I might have advisors, but actually if I don't like what they have to say, I decide thanks very much, and I do my own thing anyway. What are the implications for me though if I take on a strategic investor, we've obviously kind of aligned on a plan, but what if we’re then part the wide down the execution of that plan, we talk about strategy or the strategy needs to shift, but we don't agree anymore and I've got 20 or 30% shareholder, for example, now, as a partner, how does that play out? Do you find that that can be an issue sometimes? And or how do you sort of headed off at the past to try to avoid it becoming a problem?  

[00:39:13] Mark: That's right. Founders naturally are always concerned in that regard have had a hundred percent of the business today and that does obviously change when you do a partnership deal. But what I would say again, it's an important point when you're partnering with Pemba, is that because we're non-intrusive really the keys to the cabinet very much remain with the Founder and the management team. We’re not business operators. They are the business operators. They know the business inside out. And as a result of that, we are completely and utterly reliant on the Founders. And therefore, we have to have happy Founders that are comfortable with the journey. And the best way to achieve that is they can determine and dictate that journey. So, that goes to a lot of upfront planning before the partnership is consummated, ensuring that both parties completely aligned and agreeing on what the strategy should look like. I think it's important if they're considering a capital partner that you're on the same form of equity. So, everybody's in it together in that regard. I think you've agreed what the strategy should look like. You've agreed what the key hires should be. You've agreed on what the product service outlook is like. You both understand and know the industry well, but ultimately for us, the power absolutely resides and is left with the Founders. But that is definitely something that a lot of Founders have to grapple with as they make a partnership deal. The balance is you get a really strong shoulder to cry on when things are not necessarily always working well, you also get a well-resourced team that can tap into consultants that also provide you with a lot of anecdotes or perspectives that you might not have had. It's a lonely journey as a Founder, and I take my hat off to the Founders because they just do a phenomenal job on building businesses. So, to have that support network there in place is really powerful as well.

[00:41:15] Sean: And to your point, it's somebody who's got the same… as long as your equity structure is aligned and you are therefore tied at the hip with the same alignment on the same objective and the same outcome, obviously, provided for your equity shareholding, I think that's just unbelievably important. And one of the things I really like about what you said is how much effort goes into agreeing that upfront before the partnership is consummated. And I think that's one thing that many Founders might not realise. And it's probably also not the same with every capital partner, like many would… I really like the business, we have agreed a price with a greatest structure. Okay, great. Let's do the transaction and kind of now let's get into talking about strategy and then you find yourself you're three months down the path going, oh my goodness. Like we think we should be running this business differently. And that's all of a sudden now a problem.  

[00:42:04] Mark: Absolutely. And I'd also recommend any of the Founders listening that they should take significant number of references from the partner they're looking to potentially partner with. And also I references, not just current partnership deals, but go back to ones where times where economically tough, whether it be at the start of COVID or whether it be through the global financial crisis, how did your potential capital partner react during that time? Because it's all great when things are rosy, but things get a little tougher and budgets start slipping as they always do, how does that capital partner react during that time? Did they go straight away and want to take cost out of the business, for example, and damage potentially the long-term growth of the business just to hit short-term numbers. That's not a partner that you ideally want to be partnering with. So again, taking the references is really important and that's, again, something we really encourage off the Founders that we partner with is, speak to any of our partner companies past and present because they will openly tell you what it's like to work with us.

[00:43:14] Sean: I think that's one of those funny things that I'm almost like a property purchase where people are making significant financial decisions, but actually probably put less effort into scrutinising that deal than they probably do to something that's incredibly small in comparison in terms of the risk profile. But if you are going to take on a capital partner, you might really like, you might have great rapport. You might just be operating off gut feel and everything that I've said sounds great. But to your point, what happens when the going gets tough when there's bound to be some tough periods, and how they respond under stress, I think is a really interesting and important test. Now, if you had one more opportunity to share something that you'd really like to get across to Founders or something, you'd really love to have them spend time considering if they really planning to scale, what would that be?  

[00:44:04] Mark: So, we've talked about org structure. We've talked about equity plans, go-to market. I think just make a really ambitious and audacious plan on a three to five-year view. Think about what the business needs to look like then, and then backtrack to work out what type of resources that you need to achieve. It goes a little bit for the org structure, I guess, but it's probably broader than that. And so that goes to what new products could you introduce? What new services can you introduce? But the other thing is really important that the Founder enjoys the journey and we say this to a lot of our Founders it is tough at points, and we say it's really important actually that you enjoy it. Certainly, something I particularly enjoyed is the buy and build process. So, I'd actively encourage the Founders to answer your question a bit more directly is to think about the buy and build as well. Are there other businesses out there that you can partner with that expedite your growth, your growth outlook?

[00:45:12] Sean: Yeah, I love that. And I think, it might seem so simple to say, well, start with a trade of 3 to 5-year plan and work backwards, but I know a lot of businesses that are actually very successful that have absolutely no it's 3 to 5-year plan because they've the businesses evolved. It's just sort of grown off the back of saying yes to they have problems, but actually, it's very difficult to know how you should make your investments if you don't know where you want it to be in 3 to 5 years, we think about that, we probably tell our kids every day when they're doing high school, they got to think about what they want as outcome and work back from that. But actually, sometimes we don't even apply it to our businesses because maybe that's just not the way that we got to here, but the skills that got us to today, not necessarily, and the strategies may not be the skills or the strategies or the people that we need to get us to tomorrow. Mark, I really appreciate the time that you've shared with us today. And I know the amount of years and experiences that have gone into the information that you supplied with us today. And I'd like to acknowledge the way Pemba is operating because I think, and I've certainly experienced in different…through colleagues and also in different parts of my own career, that question that you are encouraging. Your potential capital, your potential business partners, company partners to ask around, do your research, go back and speak to all of our previous clients, previous ones, as well as current ones so that you can get a true and holistic understanding as to how we operate when going when times are tough, as well as when times are good, do we sort of double down and seek to invest further if there's an opportunity to, and what do we do when it gets tough? That's actually an incredibly important question for people to ask. And I think it's probably not asked enough and there's probably a lot of partnerships that go sour, because one of the other things I really like that Pemba is doing is that sounds like a significant amount of effort that goes in upfront, which potentially is a risk, because there’s a whole bunch of extra costs that goes in on both parties, sides to make that investment of time and not knowing for sure then whether the transaction is going to take place or not. And so, you stacking the deck upfront with no certainty of an outcome, but actually by doing so, once you've transacted the partnership's got all the ingredients necessary to sail, to sort of succeed as a partnership, as well as, sort of excluding the business and its capacity to perform as a partnership, you've got the right ingredients to make the partnership work, which is super critical, I think if you're going to have somebody, who's that going to be that influential in your journey. So, I'm very exciting to hear. Thank you very much for sharing with us today. How can people get in touch with you or follow along with what yourself or Pemba doing?  

[00:47:36] Mark: Yeah absolutely. Thank you for having me today. It's been great. We'd love to hear from Founders that that might have interest in and think they're a potential partner for us. LinkedIn is a perfect way of doing it. So, I'm very happy to connect either LinkedIn or Sean, if you have member companies that want, please send them my way.

[00:47:58] Sean: No problems at all. Well, folks, I hope you enjoyed the show today with Mark Bryan from Pemba. Thank you so much, Mark. A couple of things before you go team. If you enjoyed the podcast today, please jump on Apple Podcasts. Obviously subscribe, leave us a review and let us know what you think. The team absolutely love it, helps more people find it. And we really appreciate that. If you'd like to know when new episodes are going to drop or also when the guests provide them tools or templates or frameworks that you might find valuable, they gave us to those and those people who are leaving the emails on the website, get access to those as soon as those things pop up, if you like the socials, you can find us on @scaleUpspodcast on any of your favourite socials. But remember that the only thing that can truly, truly guarantee that you're not going to be able to scale, is actually to give up. So, if you are succeeding and want to get that faster, then maybe it's time to look for a potential capital partner or if you're finding things tough, you've got to stay in the game, stay unshakable in your faith that you're going to get there, but remind flexible in your approach. You've been listening to ScaleUps Podcast. I'm Sean Steele. Look forward to speaking to you again next week. Thanks so much, Mark.

[00:49:04] Mark: Thank you, Sean.

[00:49:09] Sean: G’day everyone, just a couple of quick things before you go. If you have questions that you'd love myself or an upcoming guest to tackle about challenges that you're facing in scaling your business, please just jump straight on the website. Scaleupspodcast.com. You can record your message straight from your mobile by hitting the button on the right-hand side of the page, or you can just email them the old-fashioned way, questions@scaleupspodcast.com. And just a quick reminder, nothing we spoke about today constitutes financial business advice. If you are considering making big decisions in your business, seek out a professional who can look at your situation in detail and make sure you're getting sound personalised advice. Thanks for listening. Look forward to being back in your podcast feed next week.

About Sean Steele

Sean has led several education businesses through various growth stages including 0-3m, 1-6m, 3-50m and 80m-120m.  He's evaluated over 200 M&A deals and integrated or started 7 brands within larger structures since 2012. Sean's experience in building the foundations of organisations to enable scale uniquely positions him to host the ScaleUps podcast.

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