#415 Rachel Murphy from The Grafter: How Founders Can Grow, Raise, and Exit The Smart Way

0:01James Somauroo:Welcome to the Health Tech Podcast. Here we talk about everything healthcare and technology. And I'm your host, James Somauroo. Rachel Murphy, welcome to the Health Tech Podcast. How are you doing? Hey, James. Yeah, doing good, mate. Really good. Thank you. Yeah, so Rachel, delighted to have you on. I think this is going to be a good one because we cover a lot of health tech businesses on the Health Tech Podcast. we get a lot of entrepreneurs coming through and I think a lot of people being sold the dream of exit and well ideally building for an exit they want the growth they want the impact but obviously exiting a business and that can look like a lot of things that's failure is an exit famously as the phrase goes so there's many ways to exit a business but you're obviously being an expert in this having done it a few times and now helping other people to do it as well.

0:54James Somauroo:So delighted to have you on and you're just saying to me that 50 % of the companies that you work with are in healthcare so we've got lots to learn from you here about growth of companies, about driving revenue, getting to a point of even exit being an option and then obviously going through and getting an exit being the goal for a lot of people. I think we can sort of drill down into that and see what the innards of that stuff are but um welcome first of all how are you i am uh i'm very good thank you mate i'm uh struggling slightly i've got the uh got the infamous covid uh which wasn't which wasn't quite the gift i was uh aiming for when i i landed in Spain we're doing a little test so we're out here for 12 weeks to kind of see what this you know working remotely lark is like and I'd see my other half building you know for the for the third time listen if I do build another company then I'm adamant that I want to go and kind of live in a warmer period yeah and and so a couple of years in I thought well I better get my finger out actually and uh get out there and see what it's uh see what it's all about delighted to see that it is pissed down in the uk since i left actually mate so it's been it's been a good start i'd say apart from the covid bit yeah nice yeah nice it does look it does look far too warm where you are to to be having covid um but i'm sure we'll clear it quickly um so rachel listen it'd be good to be good to chat about your journey up until this point then um and sort of i guess why why healthcare Have you always built in healthcare?

2:36James Somauroo:What were the first two businesses? Yeah, first two were in healthcare. So I, well, the very first business was social care, but of course healthcare. And that was a consultancy and going back many, many years. So I was, what was I, early 20s. And I was implementing the first web-based social care system in the UK. And I had a strong view that whilst the software was good, it was going to be very tricky to get social care departments, local authorities to implement this software without a kind of team of like professional services people who would be able to help. Now, the ideal setup was that they would be social workers that were seconded over.

3:35And I pitched the owner of the company and I said, listen, are you building out a PS capability? And he said, no, the software's shit up. We are selling the software. They're going to use it. Jobs are good. I said, oh, right. I said, well, if you're okay with it, I'm going to rock up wherever you sell the software. I'm going to build a company. and we're going to do the implementation. And I think he thought, you're about 25, love. You're obviously very lively, much livelier than I am at 47. And so I don't think he thought it was much of a threat. And we wrote a mill of revenue in the first 12 months and we ended up doing implementing the software for about 42 local authorities and then kind of went on and we built out e-learning software.

4:35We built a training academy for people that were implementing the software. So, yeah, it was good crack. But that's going back like 20 years now. And then second business was an agency. So different was the second company. And different was basically user research all the way through to implementing software. And it was that kind of user research, UX, design, dev, build, and then put it live. So we built things like the COVID home testing service for the UK, NHS jobs. So the national system for all recruitment into the NHS. But we did some huge systems for both government and healthcare and then sold that one in 2020.

5:40Wow.

5:41James Somauroo:What makes you go again after the first one? you know tech entrepreneur built a tech business did you did you sell that first one so first one uh i sold the assets of the first one so the the back to that is my uh stepdaughter charlotte got sick with meningitis um and interproperial septicemia a couple of years into me building that one uh and that kicked off probably a 12 month period six months for charlotte in icu and then a further six in hospital. And Charlotte, yeah, Charlotte's a triple amputee as a result. And for obvious reasons, you know, taking time out of the business and being there with family was top priority.

6:26But, of course, we were in a very early stage. So what happened there was, you know, I prioritized the right thing, but it meant we ended up selling the assets rather than it being a kind of growing concern uh so uh yeah it's um timing and um and and you know charlotte was the

6:47James Somauroo:top priority as she should have been the second business and building that um well actually let's talk about the the environment of those first two businesses because there was somewhat of a i guess a tech boom tech was hot it was there was so many tech businesses being built and it seems trickier now what was it about that was there an element of timing at that time for those types of businesses in comparison to now like what what do you think of the differences between then and now well I think for the second one for different um the we it wasn't awash with agencies that were doing user research through to running live services.

7:32So it was a much earlier stage. And I think there was space in the market to really double down on having domain expertise in healthcare. And I think, yeah, there's a hell of a lot more now. But also, you know, I thought it was a tricky time at that point dealing with the NHS. It's nowhere near as hard as it is right now. And so it's, you know, it's all learning, isn't it? Because if we play that tape forward, you know, I sold that business during COVID. And so, you know, you sell a healthcare consultancy during a global pandemic, you know, you can have a good result if you know what you're up to.

8:21and then as we know valuations went through the roof for healthcare businesses and that now they've plummeted and and they've probably dropped lower than you know the the market value I would say but they were so bloody inflated back end of 2020 2021 but you know it becomes the new norm really quickly so I think I think the timing for different was key I think selling the business during a pandemic was you know I could talk up a storm and say it was perfectly timed and executed the one thing we did do we had a cell pack ready 18 months before we were selling the business and that very much leads into why I built the grafter if I'm honest but by having that ready it meant you know when we were up for conversations or people knocked on the door we we could articulate have a data room show them what was going on in a way that most small businesses doing you know we were doing 10 mil but most businesses couldn't have you know

9:30James Somauroo:couldn't articulate yes understood so just filling in the rest of the story then for now and then we'll go back and talk about more of those topics but the grafter tell me you mentioned it just then Tell me what the Grafter is and why you started that. So the Grafter is a direct result of finding it hard selling, the last business, and a deep belief that there is not a vehicle methodology or service out there for entrepreneurs that helps them maximize the value of their business prior to an exit. and and that was what prompted me to design the methodology and build that out and get it launched and that happened a couple of years ago and the the rationale really is I'd found it hard going through that process even though I had you know a brilliant lawyer sitting alongside and I I just don't believe that there is that service out there and so wanted to build it and that's that's what we've done over the last 24 months yeah it's really interesting isn't it because we talk about exit and it can sound a little bit mercenary talking about exit because it's especially in healthcare where we're you know we're afraid of profit and we don't want to talk about money which i think is not a good thing for actually creating value within a system because money really is just the proxy for value.

11:01James Somauroo:It's just how we measure it and how it moves to help create it in various places. But yeah, what we're really talking about is maximizing value. So what you're helping to do is maximize value. You're helping to increase revenue, which then increases the impact of that business. You're helping to streamline processes and reduce costs. All of this just increases the value of a company, which is reflected in an exit value. So that's the interesting thing. You're actually a value creation business you're helping businesses become better businesses which i think is really interesting but also to address the mercenary point like i think that is also something about if we building business is hard and really hard especially when you're borrowing capital or you're you're raising equity funding or your debt or however you're raising that money you're borrowing all these things from other people like you're you're loaded with so much responsibility and you're pushed on doubling revenues every year and all this stuff it's horrendously stressful what you need to sacrifice and risk that on some level I'm sort of thinking as I'm talking here but on some level like streamlining that exit process and and showing people what that value could be and and you're creating incentive aren't you like you're helping streamline the system and create more businesses in a way if people know that they're going to get financially rewarded for all this sacrifice that they're going through.

12:25James Somauroo:And of course, not everyone does. But at least that aspiration, ambition is there if we can streamline the exit process. I totally agree. And also, I think you've probably given me a better strapline than we've rustled up in the last 24 months. I'm in comms, Rachel, to be fair. Yeah, yeah. I should have called you a while ago, mate. I think that you're absolutely right about maximising value. But also the point that you've made there is so key in the UK market. You know, when I launched initially, I called it eight figure exit. And it was not it was so hard for entrepreneurs in the UK to get their head around.

13:07You know, if we were launching the US market, it would have been why is it not nine figure? But in the end, we pivoted to grow raise exit. And that's the name of the methodology, because just having it tied to exit is it's not, you know, we're very British. It's not palatable talking about money, is not palatable talking about exit. And what we also found was we ended up doing so much work around driving the revenue and creating value for businesses that it was a no brainer for us. You know, those pieces of consultancy folded into the methodology and allowed us to drive that. And I think it's really important to say what we what we do as a business is, you know, we land and we do a diagnostic with the founder, with the management team.

14:09And we do that to put a stake in the ground and understand exactly where the business is. And, you know, we get a maturity assessment for each part of the business. This is not about saying, you know, you're a level three maturity. What the hell is going on? It's about saying this is where we are and, you know, then creating a baseline for a plan going forward, be that grow, raise or exit. But by doing that diagnostic up front, we, you know, we truly understand where, you know, where some of the challenges and the opportunities are. are um but in in way of uh in way of exit um yeah moving straight to exit it's a dirty word in the UK an exit can be management buyout an employee owned trust um it can be sell to the highest bidder it could be a partial exit there's so many flavors and and uh variety that's that's part of the of

15:16James Somauroo:the educating that we need to do could you just run through a few of those actually just because i i obviously this is the world you're in all the time and i think even for someone like me who owns a bootstrapped business that is you know employing 15 20 people like this is you know these types of things i don't feel i'm educated enough on them let alone everyone listening so like it'd be quite useful to run through a couple of those so let me let me go through go through some of these. So the most well known would be you are selling your business to a competitor. And therefore, you know, there is a valuation component of the business.

16:01And then there is agreeing, you know, the terms around how you're going to sell the business for what number over what period of time, what any earn-out provisions look like, and an earn-out meaning, you know, you're not free to go and work elsewhere. You need to go over as part of the transaction. So you've got a sale to a competitor, normally based on an EBITDA or a multiple of the revenue of the business. So there's so many flavours for valuing business But the one thing I would say is a business is only ever worth what someone's prepared to pay for it. So you can dream up the valuations all you like.

16:49And the analogy I often use is it's a bit like getting Foxton's round to value your property. You know it's going to be inflated and it isn't selling for that. And you can liken that to a wealth of different business brokers. for me I would rather we were utterly realistic about what the valuation of the business is so you've got a sale to competitors you've got a sale to a strategic so a strategic is likely to be somebody who isn't necessarily in your sector or industry but wants the knowledge the skill the IP the playbook that you've got to add on to their business and they will therefore pay a premium for that.

17:32And then you've got a partial exit. So they are taking some equity in the business, and they are plowing some money in. A great example, we sold Carruthers and Jackson very early into building the grafter. And Caroline Carruthers was my boss many years ago. And now she's an exiteer. So it's gone full circle. But Carruthers and Jackson was a partial exit. What I mean by that is they took some of the equity in the business. She took some cash off the table on a day. So the day the deal was done and they then plowed money into the business. She's doing the job that she absolutely loves, but she's got a much bigger business behind her.

18:21With a lot of the back office and the sales and marketing functions. so the skills that she had and the IP she had you know opens doors for for them so and then you've got a management buyout so you know within a business you have a management team and they may decide you know actually we want to buy the business and so they they they pull together resources make an offer and then you've got an employee-owned trust which is one of the few processes that the current Labour government haven't changed the tax treatment around. So an employee-owned trust is a very tax-efficient way for a founder to sell their business to a trust.

19:16You need to establish a trust. And that trust is normally made up of employees of the business. but what it enables is if the business is kind of throwing off cash then you almost do like an annuity deal so you get paid out over a three five seven ten year period but the the trust effectively owns the business so what it means is that you know employees who wouldn't naturally become entrepreneurs, you know, move through that cycle and ultimately will own equity in a business. So there's tons of different flavors. But the, you know, the bit that we do, we have to understand what the founder and founding team want from a personal perspective.

20:11Because if we don't understand that we'd run the risk of potentially helping them sell to the highest bidder and then being deeply unhappy working for a listed company or a product firm and so so much of the time that we spend as exoteers at the grafter is understanding from a personal perspective you know the why and what they want the future to look like and then it's like pieces of the jigsaw that we build a number of artifacts. And I think it's probably important to explain what they are. Once we've done that kind of diagnostic of the business and if we agree with the founder they want to sell, it doesn't happen in five minutes.

20:58To your earlier point, 50 % of the businesses we work with are planning to exit in three to five years. But there's a lot of work that needs to happen in these businesses to get them ready for an exit. And there's huge value in kind of doing that properly. So we would sit alongside, we would build a data room. So we'd build a repository of the key documents that underpin the journey that you've been on. Things like your published accounts, your P &L, what the strategy is, what your key contracts are, who the key people are in the organization. So there's a raft of key documents that make up that data room.

21:44And then we build a cell pack. And a cell pack can be called information memorandum, confidential information memorandum, loads of different flavors. But what it does is it tells the story, where you've come from, the successes you've had. And then it starts to lay out the opportunity for a potential buyer. And if we go back to what I've just explained, there's lots of flavors of potential buyers. So, you know, part of the, I guess, the art and the skill, the creativity that ExitEars bring to the process is once we understand what the founders want, we want to create that narrative in a certain way.

22:27And it's a very, very powerful process. For me, when I sold the last business, genuinely, I understood that business better than I'd understood it when I've been running it for the five years previous and that is crazy but you're looking at it through a different lens well this is the thing that this is actually what I was going

22:45James Somauroo:to say or a question I was going to ask is does preparing for an exit make you a better business and it's a question that relates to this idea that what we're actually saying in preparing for an exit is what we're doing is we're sharpening up the business making all the value very visible and therefore you're actually taking a much greater look at some of these things and like I'll give you a practical example for the listeners here so like let's say at SOMEX we were thinking about this we've got these things that are sort of partly visible not really that visible but drive a lot of what we do in terms of our attention our influence on our distribution so yes our core business at SOMEX is we're a communications agency so we have the simplest business model in the world on that side of the business which is we spend less than we earn each month and what we do is communications and marketing activity for retainers and we pay staff slightly less than what clients pay us it's an incredibly simple business model so on the face of it you could value the business at whatever multiple you get for a communications agency and that could be that however we also do health tech pigeon seven and a half thousand subscribers in health tech and we have a lot of influence on the narrative of what people are reading and that kind of thing we've got this podcast we've got the health tech pigeon podcast we've got next gen which is the next generation network for young leaders in health tech and biotech and that's that's something that we've got now which acts as a talent pipeline to what we do because those people are generally under 30 and and you know see themselves as future leaders and driving stuff of their own so like we have all these things that are sort of ancillary to what we do and adjacent to what we do that I think my hypothesis is that if we were looking at an exit actually a good a person that came in and and I keep using the word exit but really we're talking about if I'm maximizing the value of what what my health care business is here it's actually taking a greater look at some of these things and going well there's value locked in here there's impact locked in here why aren't you generating more sponsorship revenue because you can use that sponsorship revenue to drive the growth of it it can influence more people it can do more things and i think that's my hypothesis here with like i i'm sort of at a point now where okay we can talk about exit you could we should start thinking about an exit and build exit but i don't think for me at the moment it doesn't feel like like that's the outcome that i necessarily want to do anytime soon it's more for me going through this methodology that you've just mentioned just to make my business better so I can have more impact in the health tech space?

25:27Well, and I think, you know, you've kind of hit the nail on the head there in way of the approach. So if I was looking at your business, I would be saying, you know, let's get that IP documented. And I mean, you know, create the playbooks, the how you are operating, because there is value all over the place there. So we'd want to paint a picture of that because the chances are, you know, your potential acquirer in the future may well not be another communications business. It may well be somebody who thinks, wow, there is incredible value market access here across, you know, health tech and biotech.

26:11And we want a piece of that. So, you know, you're absolutely right. by going through the process of that methodology,

26:23we help founders and their teams to realize that and create those playbooks, create that IP, get it documented and get it understood, the secret sauce, the stuff that you just do in your sleep because a lot of that is huge value add. You know, if I think about the sale of my last business, part of our multiple was attributed because the brand that we generated. Now that is deeply unusual for the sale of an SMA, but it was so synonymous with delivery from a healthcare perspective into the NHS that it was, you know, it directly contributed to part of the valuation. And it's, you know, in a very robust playbook around how we approach to discovery and alpha and beta delivering services into government and healthcare and again all of those things play a really key part but i i think and rightly why would founders know that because here's the news they are incredible domain experts in their area this is a completely different domain uh and so you know pulling in uh and getting some some help around readiness for me you know that that's why our kind of ROI is so powerful we you know we haven't had a client go through the methodology that hasn't achieved an ROI within a 12-week period because you know you're creating so much value.

27:57James Somauroo:I think that's it I think that is it I think that the thought process of for the founders this thing of like building for exit I think go it's not a money conversation for me that the thought process and a building for exit is actually a process of looking for where the value is because in preparing for exit you're looking at your business academically forensically and going okay for potential buyers there's loads of value here therefore there is loads of value here and actually we should be doing more here and here's a place to put the accelerator on because actually we can create more values so that for me is what it feels like here's something that i'm interested in if you see the name change on our service later today, we'll know we have absolutely ripped off that suggestion.

28:41Just give me a discount when I come for your services, right? And no, you can't lay claim to it. But yeah, you can get a discount off the back of that.

28:49James Somauroo:I'll hold you to that. Here's something that I think we can chat about because one of your wonderful qualities is you're not afraid to speak your mind and be very honest and open. and so i'm interested in what you think about what the what the uk is like for entrepreneurship because i know this is quite broad this goes beyond health care but i'm seeing a lot i'm seeing and hearing a lot of discourse at the minute politically obviously you know relatively new labor government if you compare it to how long the conservatives are in um there's change there's change the taxes there's change to loads of stuff not i want to make this a really dull conversation about loads of different taxes however there's broad brushstrokes here that we can talk about in terms of you know I mentioned at the beginning if we create the incentive right for starting a business people are more likely to take the risk and I'm just interested in what you think about where that is like is there enough incentive for the right level of entrepreneurship do you think more incentive could be created with a different system do you think we're doing well or could be doing better?

29:55On the basis that you have said I am outspoken, I won't hold back on that if you...

30:02James Somauroo:Please don't. No, I'm interested in you. I'll challenge it where I can, but yeah. Yeah, of course. I think that the Labour government are an absolute shambles. Okay. And I think that... I just think the lack of entrepreneurial thinking worries me greatly. The UK was coming from a low base anyway under a Tory government. So I want to make that point. In way of things like, you know, when you, business relief, so when you're selling a business, you know, there was a reduction around the, you know, the percentage of tax break. But, you know, that that continues to get worse. And I think we only need to have a look at social media to see just how many entrepreneurs are voting with their feet and exiting stage left.

31:09and you know including like you know entrepreneurial royalty you know I've got a few absolute heroes of mine who are entrepreneurs who are on the move outside of the UK at the minute and that really terrifies me because I just think that we are going to have a real drain of innovation and entrepreneurial thinking. And I think it comes from a couple of different places. If I was in the Labour government, I would be creating incentives to start businesses. I don't know what the stats are, but I would hazard a guess that 50 % of the UK is employed by SMEs. And I mean, we need to validate that. but when you hike up national insurance you're de-incentivising people I know for me it has, building a grafter there's one permanent person in the grafter, you're talking to her and everybody else is an interim or fractional and that will continue to be the model now that model would be different if the NI piece was different and I just think the you know the incentives for bootstrap founders i'm a bootstrap third time around um i get the seis and the eis you know the ability to protect if people are investing in but where the hell are the incentives for the bootstrappers uh and um that's the that's the bit that really really frustrates me um and i i just think that you know there's a reason i'm filming this from spain i'm doing a recce for a 12-week period to see what life would be like in a different location and it really pisses me off because it's really easy in the UK to set up a business.

33:12I think the digitization of government services is exceptional so you know I think that has been good for a number of years but I think if you go below that setting up a limited company and actually what are the incentives and how do we maximize that kind of innovation and to your point it is about risk you know you're asking entrepreneurs to risk it might not work more times than not it doesn't bloody work you know you're running five jobs you're working 10 10 hour days seven days a week and there's no incentives it's fucking crazy we might need to edit around that I'll just put the

33:54James Somauroo:explicit label on um it's good to hear the passion i think you've so interestingly don't spend loads time on this but like you've mentioned two different levels there which is quite interesting the starting the starting out people and the entrepreneurial royalty and you've said like equally you're struggling to see where we're doing well on both of those extremes what would you what what would you do differently I think is a like I'm not asking for specific policies here but like broadly what's the problem and what would you do differently in those two levels so I think the problem is a distinct lack of entrepreneurial thinking so we need incentives to set up businesses and you know that will come from a tax from a corp tax from a national insurance We need those incentives.

34:49You know, if I could wave a magic wand, I would have something like the SBA scheme that they have in the US. So this is a federal government supported way of borrowing money, 80 % underwritten by the federal government, and 20 % is covered by the business owner. But this means people can be starting businesses, buying businesses a hell of a lot easier. Now, that's not to say that I agree with all the politics in the US. That'd be a wild thing to say. That'd be a different podcast and a different palette. However, some of those incentives does drive that optimism and excitement that you give in your chats with US entrepreneurs.

35:41and so I just think we are missing a trick in the UK right now around early stage setting up bootstrapping and supporting and then as things start to start to grow and or you're building value you're thinking about the future it's you know you're just getting shafted at every turn And that's the bit I think that is driving people to say, you know, where are the incentives? We're heading into winter. I know this sounds dramatic, but everything feels bloody worse when it's raining.