Friendships, Earn-Outs, and Partnership Breakdowns
Have you ever thought about going into business with a good friend? Steve Grace did—and he doesn’t recommend it. For as many times as we’ve heard a partnership success story, Steve’s experience proves that there’s always an exception to the rule.
In this episode, we’ll cover how Steve first got into business—and how he ended up partnering with a good colleague and friend. Having previously sold a company for a seven times multiple, and with shared backgrounds in recruitment and complementary leadership skills, Steve’s partnership seemed like a success. With over 25 employees, a great cash flow model, and enough profitability to consider exiting, Steve and I reflected on the exact moment where everything would (unknowingly) go wrong.
Another two years, a friendship breakdown, and barely enough communication to properly exit or sell, Steve’s advice about getting out before a full-blown breakdown needs to be heard by every entrepreneur.
If you’re thinking about going into business with one or more friends, family members—even shareholders—I cannot stress enough the importance of listening to Steve’s story. Discussing the necessary agreements, negotiations, and brokers to have in place, this episode is full of lessons hard learned during the exit process. From the importance of hiring independent valuers to the criticalness of updating a buy-out agreement, I encourage you to tune into Steve’s reflections on starting a business and scaling to sell—no matter how messy it becomes.
What you will learn in this episode
In this episode we’ll cover everything from:
- How Steve’s first foray into selling a business validated his young entrepreneurial mind—and why this lack of experience blinded him to a broker that claimed to be representing both sides.
- The standard methodology used when valuing recruitment companies.
- The importance of having a shareholder's agreement.
- How Steve ended up in business with an industry friend, and how the duo tried to navigate their challenges.
- Why Steve and his partner met with 4 potential buyers, and how they ended up completing the deal with their chosen acquirer.
About Our Guest
Having successfully built and sold two profitable businesses from the ground up, Steve Grace knows a thing (or a thousand) about what makes a business successful.
Steve’s new venture, The Nudge Group, was born from a genuine desire to help businesses grow from start-ups to unicorns. After months of research and testing different methodologies, Steve has developed a new and original recruitment model that gives early stage and rapid growth businesses direct access to top-tier talent and specialist expertise without the traditional price tag.
Steve is also the Founder and Host of the Give It A Nudge podcast. Talking to founders, CEOs and investors on the show, Steve enables them to tell their unique stories. The Nudge Group’s mission is centred around your story: understanding it, showcasing it, and finding talent aligned to it, to achieve long-term goals for everyone.
Connect with Steve Grace
(2:39) Listen to Steve’s thoughts on the entrepreneur’s quandary—and how his desire for freedom of thought and mind ultimately led him into his first, second, and third businesses.
(9:00-11:00) As Steve reflects on his first professional partnership, he realises that even with a 49% stake in the company that not having a shareholder’s agreement was a wrong move.
(12:30) Discussing the traditional third-third-third rule in recruitment valuation methodology, Steve discusses the implications of the costs, the company, and the recruitment consultant all cutting in by 33%.
(14:00) How Steve’s first foray into selling a business validated his young entrepreneurial mind—and why this lack of experience blinded him to a broker that claimed to be representing both sides.
(15:55) Further discussing the standard methodology used when valuing recruitment companies, Steve and Simon list off the common transactional pieces that are of the biggest value during a deal. (Hint: it has more to do with your contractor book, signed agreements with clients and staff, and if the founders are willing to stay than physical assets.)
(17:27) Why Steve and his partner met with 4 potential buyers, and how they ended up completing the deal with their chosen acquirer. (In summary, a big interstate company who couldn’t successfully set up shop in Sydney with good people was the real attraction.)
(18:30) Steve shares his thoughts on why he believes that selling assets and selling a business are two different things—and why putting a lot of your sale value on the back end of a long earn-out may not be in your interest.
(23:23) Listen as Steve details how his lawyer worked to pre-emptively end his earn-out—and the challenging road it took to get there. (Also, tune in as he details why he wanted out—and why a company’s culture can either support you or go against everything you believe in.)
(27:42-29:00) This is a BIG one—listen in as Steve recounts how he ended up in business with an industry friend, and how the duo tried to navigate their challenges. From a shareholder agreement to a CEO, Steve reflects on the moment when he knew it was time to go. (Disclaimer: think that you’re ready to exit a partnership? Steve’s advice is if you think it’s time to go, it is.)
(32:20) Never heard of a Texas Hold ‘Em agreement? Steve recalls the time when their CEO left, and when he and his partners forgot to reimplement a strategic exit plan. (One key piece of advice? Don’t do this.)
(34:55) Why getting your company independently valued is fair for everyone—and how auditors, brokers, and your partner can support the completion of the buy, build, sell cycle.
(36:45) Steve reflects on the period after his partnership breakdown, and why he spent several months thinking about his next start-up.
(42:50) Steve’s one key piece of advice? Beware the co-founder. Although we like the idea of working with our mates, this episode unfortunately reveals how, what, when, and where things can go sour. Lastly, Steve recommends the importance of just keeping on—and points out that the only way you can really fail is if you stop.