Jeremy Harbour: big deals with small businesses

Jeremy Harbour has learned his share of lessons on his path to becoming a successful entrepreneur. The UK-born serial investor has bought and sold over 100 companies and has specialised in small and medium-sized businesses as an asset class for over 20 years. He talks to Julius Baer about how he got his start, how he wants to help democratise wealth and where he sees himself in the future.

Jeremy, can you tell us about your first experience as an entrepreneur?
Jeremy Harbour: My earliest entrepreneurial memory is when I was about seven years old. My mum had a beauty salon and I’d cut all the flowers down in the garden – which my parents weren’t too happy about – and put them in jam jars to sell them to the ladies that were coming to my mum’s salon. But my first real business was when I was about 14. I’d buy bulk wholesale items, anything that came up that was going cheap. I would then sell them at car boot sales at the weekend and then turned that into a proper business. I had a market stall and would sell watches and jewellery and all sorts of other things. So, I went off on my entrepreneurial dream from the age of 15. 

What are some of the most important lessons you have learned as an entrepreneur?
You learn the most when you fall flat on your face, and it teaches you a bit of humility. When you first start out in business, you think you know everything, and then every day brings a new lesson and some of those lessons come with some pretty painful school fees, so you have to get through the mistakes. Business isn’t logical: when you look at it on a blank sheet of paper it should be easy, and everything seems to make sense – then when you actually try and execute a plan it never really works the way that you expected. So that’s the rite of passage as an entrepreneur: experiencing that full range of pain that you have to go through to get something off the ground. 

You don’t have to run the marathon – you can just run the last ten yards and still get a medal.

Can you describe how you got your start in buying and selling companies? 
Yes, so in 1997, I had a telecoms company. Telecoms is very acquisitive, so people are always trying to buy you. I was being pitched to by companies that were trying to acquire my business. What they all had in common was that they weren’t going to give me any money. So, I pivoted to the idea that I don’t have any money either, so I’ll go and buy a business myself and be the buyer instead of the seller. I went looking for other telecoms companies and when I did my first deal, it was a huge epiphany. We grew by a year’s worth of sales in an afternoon and we hadn’t had to invest any money in marketing. It was a no money down transaction, we didn’t have to borrow money from the bank. It was a distressed deal and I bought the company for basically one dollar. And I suddenly realised that you don’t have to run the marathon – you can just run the last ten yards and still get a medal.  

So, after a number of years of growing that business, I decided that I would sell it and started thinking about what I would do next. I realised that the bit I really enjoyed was the deal, buying and selling businesses, so I decided to do that. I also decided to de-risk that activity, meaning don’t put any money in, so you only leave room for upside. I did a lot of distressed and motivated transactions where I would effectively buy all of the equity for a dollar, restructure the balance sheet or do a turnaround and then sell again quite quickly. I did that for a number of years and I probably did about 50 transactions like that on the buy and sell side over a ten-year period.

How did that evolve into your current business model and your focus on small to medium-sized companies?
While I was doing those transactions, I noticed this huge gap in what I call the mid-market, in other words, companies that are profitable, debt-free and typically well-run, with a million to five million of EBIT. I saw that they’re incredibly underserved. If you look at every mature market, fifty percent of GDP comes from small businesses and yet, they are basically completely detached from all of the money in the world. One of the reasons for this is that small businesses are too risky. If they lose a couple of key staff members or customers, they have a terrible year and suffer from their scale. Also, from an investor standpoint, you can’t put enough money into them, you can’t take ten million dollars that you want to invest – that’s more than many of these businesses are worth. Another reason is liquidity. Small businesses are horribly illiquid, so when you invest your money in them it can take a decade before you get your money out. 

Fifty percent of GDP comes from small businesses and yet, they are basically completely detached from all of the money in the world.

So why did you decide to specialise in that segment?
Well, I decided if I could solve the problems of risk, scale and liquidity in the small business world, we could effectively unlock global capital and get it into small businesses. And I thought that would create small business as an investable asset class. And if you could do that, then you would have the potential to democratise wealth because effectively, asset managers would want to be diversified and would want to have exposure to such a huge part of the economy and would parachute trillions of dollars into the hands of small business owners. 

That’s why we created our own governance structure – we call it agglomeration – which is a trademarked structure that allows small businesses to collectively own and control a fully reporting public company. It’s a way for small businesses to effectively, collaboratively IPO so they can get together as a portfolio of businesses and access the capital markets. That solves the problem of risk because it’s now a portfolio of small businesses diversified across countries, currencies, products and services. It resolves the scale issue because it now has a huge profit and loss and balance sheet that they can point to, and it resolves the liquidity issue because people can invest and divest from the business very easily. We just listed one company using this structure, it’s currently got about 400 staff, 150 million dollars of revenue, about 15 million dollars of profit and we’re gradually adding more businesses into that as we speak.

Can you tell us about The Harbour Club?
I started teaching people how to buy owned and managed businesses as kind of a side effect in 2009. That led me to set up a programme called The Harbour Club, which is like a three-day boot camp that is creating a global network of entrepreneurs who are actively buying and selling businesses. It’s really taken on a life of its own in the last few years and I now do several seminars a year. 

What are your plans for the future?
We’ve got a really big vision when it comes to agglomeration and this idea of democratising wealth. With the largest transfer of wealth in history underway, which is tens of thousands of baby boomers retiring on a daily basis looking to succession plan, there is an oversupply of businesses. So what we’re doing, also through The Harbour Club, is providing that succession plan for these businesses that are becoming available. We want to take them into that public environment and create shareholder value and, like I say, democratise wealth. So, I really see myself in the next five to ten years being pretty much as I am now: on a non-stop roadshow of meetings with these business owners, dealing with investors, taking companies public and executing on this vision that we have. 

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