Madeleine: Hi, David. Thank you so much for being on The Succeeding Small Podcast. I am so excited to talk to you! You have an incredible YouTube channel that is just packed with so much value about buying and selling small businesses. Thank you so much for joining me today and sharing your incredible education with our audience.
David: Madeleine, thanks for the invitation! I love to do this. I love to go out, meet new people, and have these conversations—dive into this topic area. I mean, let’s face it, it’s like my life, right? So, you know, I want to share.
Madeleine: Yes, I love that! You can tell when people lead with value. So it’s just so incredible to get to learn from you today.
Madeleine: So tell our audience who you are, and I would love to also know where your passion for small business came from, because that’s a huge part of who you want to educate and bring value to.
David: Well, let me give you a little bit about my history first. I always had those small business dreams ever since I was a teenager. I did those teenage-type businesses that people often do. Growing up in Canada, that usually meant shoveling snow and then mowing lawns—sort of the balanced year-round seasonal business.
As I got older, I started to get into sales. I actually, I don’t know if I’ll date myself with this, but one of my first jobs where I worked outside the home, not doing my own thing, was as an ice cream salesman from one of those three-wheeled sort of insulated carts. You know, you’d go to public events or even through neighborhoods in the evening and sell ice cream. I was 14 when I used to do that, and I did really well. I mean, this was back in 1989, I think—it’s the summer I did that—and I was earning like 60 or 70 bucks a day! So that was pretty good money in those days. I know that a lot of my colleagues who were trying to work part-time little jobs and stuff were being paid like $4 an hour.
So it looked pretty good from that point of view, but I always had an interest in business. And so I let that lead me to business school. I thought that it was going to be this place where everyone’s sitting around dreaming up business ideas and figuring out how to execute them, but that’s not what they do there.
Madeleine, what they do there is teach you how to be what I call a Fortune 500 bureaucrat, which is just like how to be a pencil pusher over at General Electric or something like this. So we’re doing all these case studies about whether GE should enter a new foreign market or something. And I’m thinking about the businesses we see when we’re walking around in our own communities—like tire shops and restaurants and florists and catering businesses and all that kind of stuff. My real business education came when I got out of that business school and worked for the Yellow Pages.
My job was literally to call on the business owners and the managers of those everyday main street kind of businesses and ask them questions about how they made money, what their business model was, and most importantly, who they would like to meet next as far as customers—like who their ideal customer was and what that person was going to be looking for. I would help them create ads for the Yellow Pages to bring those customers in. I got to learn a lot about all these small businesses, and I did that for over seven years.
Then Google came around. In the beginning, if you typed “plumber” into Google, you just got plumbers in California. But then Google started to get better and better, and then all of a sudden we had smartphones, and I was like, “Oh, I gotta get out of this.” So I left the Yellow Pages and started my own business with a partner, and we did it for a year and a half. We were serving homeowners; it was a home service business.
I really started to become irritated by those people because homeowners are, you know, consumers—they’re not business people. It was harder for me to relate to them. My seven years as a Yellow Pages rep meant that I spent all day long talking to business owners who were people that had a lot of kinship with my interests. Right? Now I was dealing with these homeowners, and I was just like, “I don’t think I’m really happy with this—doing this every day, dealing with these clients.” So I put the business up for sale, and it was the first time I’d ever been involved in the sale of a business. I sold it, and at that time, getting into this whole idea of buying and selling businesses was not on my radar at all.
But yeah, I got into my next business, which was a commercial debt brokerage. And so I was helping small businesses get financing, especially when they were turned down by banks. And so I was using leasing companies and factoring companies and sort of B grade lenders and things like this. It was going well and I was again serving those business owners who I loved and I started to meet people who were looking for money to buy complete businesses.
And, you know, I wasn’t really able to help them, and I had really not a lot of experience with these transactions. But I very quickly realized that a lot of the people they were dealing with had no idea what they were doing. These were intermediaries trying to put deals together. Sometimes they were real estate agents; sometimes they were even accountants or lawyers. They knew their area, they knew their thing, but they did not understand much about business. When the great financial crisis hit, I realized I had to make a pivot out of the financing business. I thought, you know what? I could learn to do better than what I’m seeing.
So I joined up with a big international franchise brand in the world of business brokerage, and that gave me access to training. I went through a certification program and became certified to help people buy and sell businesses. I ran a business brokerage for three and a half years and sold a little over 35 businesses for other people while I was doing that—about three dozen.
Business brokerage was really exciting, Madeleine, but also a terrible business because it’s driven off the model of real estate. When a real estate agent sells your house, you pay them a commission when it’s sold. In the world of business brokerage, you can spend a year or two talking to a business owner before they decide to list their business with you. Then it can take you months and months to get all the information you need together to do an evaluation, create a buyer-facing package, get it ready, then start advertising it for sale. It can take months and months or even more than a year to meet the right buyer. Once you meet the buyer, you then have to work with them and help them, sometimes even build a business plan and a cash flow forecast, introduce them to the right lenders, and help them put the money together to get the business.
So we’re talking about a sales cycle that can span years easily. I remember when I first started out; it was a fried chicken franchise. I sold that thing three or four times—not to say that I did three or four different transactions, but three or four people agreed to buy it. At the 11th hour, the deals fell apart. That business was one of the first businesses I listed for sale, and it was the last business I sold when I decided to get out three and a half years later. I worked on that file for three and a half years and got paid at the very end.
It just goes to show you what business brokerage is like. I was like, this is crazy. I’ve got two young kids; I can’t even make a household budget doing this. So I left and became a banker, and while I was working for the bank, people kept calling me, and they had been given my name by people.
And they were asking me questions about buying businesses or selling businesses. And I kept telling people, I don’t do that anymore. I work for the bank. Eventually I started to say to people, I can help you, I can give you direction, but I don’t work in that world anymore. I would have to charge you like a consultant and maybe work in the evening or on a weekend or something like that as a consultant.
And I’d have to charge you money per hour or something. And people just said, sure, that’s great. And so I started this little side hustle consulting. On these small business deals. And it didn’t conflict in any way with what I was doing with the bank. But after four and a half years at the bank, they went through a restructuring and there was a package offered to eliminate my position.
I thought, you know what, this could be the seed money of a whole new business. And that’s exactly what I did. I took the package and I used that money as the runway to start a new business, which was modeled as a consulting business. And so for the past 10 years or so, I’ve been working with buyers and sellers, helping them do these small business deals, but instead of being a business broker with my compensation tied to the contingency of a deal being done. I like to say I borrowed the business model of attorneys and accountants, I just do work for people and I charge them for it.
And so my cashflow smoothed out. And I’m happy to say that I’ve helped hundreds of people do deals, sellers, buyers, and most importantly, I’ve had hundreds and hundreds of clients not do crappy deals, and they’ve ended up saving their money and not getting involved in a really bad situation, which is the world of business.
Small business is hard. And if you pay too much money for a bad business, you will end up in a position where you owe money at the bank. You have personal guarantees. So you can’t escape from the debt, except maybe through bankruptcy. And if the sales aren’t there, then the first thing that gets cut is sometimes your paycheck.
And that’s not a place where people want to go. My mission is to help people avoid those bad deals. Even from the seller’s point of view, this is one of the things that not a lot of people talk about, Madeleine: if a seller’s expectations are not properly set about what their business is and what its value is in the marketplace, people will put a business up for sale.
If they ask too much, they will actually scare off the qualified, capable buyer who could be their buyer. They’ll end up talking with people who don’t know what they’re doing either. Together, the two parties who don’t know what they’re doing will waste an incredible amount of time. Right? The other problem is that people who don’t know what to expect as far as an offer may turn down offers, thinking they’re going to get something better. I’ve had several clients who I’ve looked at their package that maybe another business broker has put together, and they’ll say, “I’ve been trying for two years to sell my business. Can you show me what might be wrong?” I’ve looked at some of these packages and then showed them why their business was worth 30 or 40 percent less than what they were asking. I gave them an idea of what a reasonable offer might sound like. More than one of these people has said to me, “Oh my God, the second person I met made an offer like that, and that was over a year ago.” These people had the opportunity to exit; they had a reasonable buyer with a reasonable offer, and they didn’t know how to recognize it.
So that’s part of what I say about avoiding bad deals: if you don’t know what you’re getting into or what you’re doing—even from a selling point of view—you could miss the opportunity. You could miss the deal that you really should be taking advantage of.
Madeleine: Wow. That is powerful. So many small businesses did not go to business school; they did not enter this with that corporate mindset. They fell in love with their craft or their mission for serving their community or growing their family. So to be able to put together these building blocks of what they need to have a successful business, to be able to sell it, maybe that was not on their minds when they started. Just saying, “Okay, it’s time to sell, and I’ve got to figure out how to do that,” piecing it together with nothing, no foundation to get them started—it’s amazing that you are able to bring that value and education to them, to help save them from bad deals, and to protect the infrastructure of their business. That way, when they do go to sell, it benefits them, benefits their families, and they can move on to that next dream of what they’re trying to accomplish.
David: Yeah. It’s the next dream, the next chapter in their life—that’s really what it comes down to. The truth of the matter is that almost nobody sells a small business with the idea of cashing out. I mean, that’s what Mark Zuckerberg does when he sells stock. He cashes out—these tech entrepreneurs that have these crazy, huge businesses. The reality of small businesses is that it is a super risky asset class. The amount of money that people are willing to pay to acquire these assets is quite low. Businesses are priced in multiples of cash flow. If you listen to people in the financial news talk about stock market names, for example, they’ll often talk about the stock price trading at a certain multiple of forward price to earnings or P/E ratio or forward multiples of EBITDA.
A publicly traded company could sell for 15, 20, or even 30 times forward-looking cash flow. These tech companies can go for hundreds of times. Most small businesses sell for like two times their seller’s discretionary earnings. That just highlights the difference in perceived risk. People are willing to pay so much more for a stock on a stock market. Part of the risk of ownership that is very different between small business and the stock market is that in the stock market, at any moment you decide that you don’t want to own, say, Coca-Cola stock, if the market is open, you can just click sell, and it’s gone.
It’s gone, and you’ve sold it. In the world of small business, I described earlier how long it could take a broker to sell a business. I mean, it can take you a long time to do a deal to buy the business. If you get into it and decide you don’t like this anymore, you could be in for a two-year journey to get out. Just that illiquidity is one of the big risks because it takes so long to do a deal. Things can materially change over the course of that time. Anyone who started on the journey of selling a business in the fall of 2019 would realize and have great stories about how the events of early 2020 changed their business sale journey probably tremendously. It was sudden, unexpected, and boy, did it have a big impact on everyone.
Madeleine: Yes. Yes. Oh my goodness. So we were discussing before, a little bit pre-chat before we started this episode, about the concept of growth through acquisition. On the flip side of being able to purchase a business—whether that is in addition to, whether that’s a different business model than what you have, or being able to grow through it by purchasing a business that is in your same vein—you’re absorbing a company, taking on their clients, and taking on their employees.
That was such an interesting concept to me, and I would love to spend this episode talking about that because I’ve had a lot of service-based small businesses do exactly that. They have friends, potentially their mentors, who are looking to get out of the business. They are ready to sell, and this CEO is ready to grow.
And so by having this kind of little match made in heaven, being able to take on this company and then grow with it is something that actually happens quite commonly in our little small business community. So I would love to be able to dive into that. What kind of expertise do you have on that topic?
David: Yeah. So, a lot of businesses that go up for sale are put up for sale. If it’s a big enough business and the owner, say, is working in the business and they’re taking out a salary commensurate with what they’re selling, you know, their time is worth in that industry. And then there’s a profit beyond that. They’re going to have something that someone wants to buy. If they’re in that situation of that size, then the buyer could be a person that wants to buy their job—buy their position—and take over their job at the same time, which is, you know, making an investment and acquiring a day-to-day job at the same time.
So that business could be bought by anyone who wants to go and do something new, right? Someone who hates their job or what have you. People that have something that maybe isn’t quite that big or a little bit smaller—it’s like, who’s going to buy a business that may not be able to provide much more than just, you know, a job for themselves? Well, the answer to that is someone else in your industry already. Because the way they’re going to look at your business is they’re going to say, “Hmm, with one transaction, I can acquire a whole basket full of customers.” Any kind of service business, if you can have an opportunity to buy someone else in your industry and just simply take all those customers and fold them into your existing system, what you’re talking about is growth without necessarily having to go through a lot of the heartache of running a completely separate business.
That’s kind of dangerous. So if you are a business owner today and you’re working in your business, you are focused on your business. All of your thoughts are about what’s best for your business. If you buy a second business, which is a completely different kind of business in a whole different industry, you’re suddenly then going to be torn. You’re going to lose focus. You’re going to be constantly flipping in your mind between the two different mindsets required to run these two different businesses, thinking about the different problems of both businesses. I’ve seen people get this idea that they want to have a holding company with many different businesses, and there are people that pull it off, but they tend to be people that own larger businesses. They’ve got more of that middle management built into their business, so they don’t really need to be on top of the day-to-day of everything that most small business owners have to keep their eye on.
And so I kind of caution people against dividing their attention with something new. If you want to grow your business and you can find other operators who have the same kind of customers you do and are providing the same kind of service, doing what we call a bolt-on acquisition, which is literally, if you think about adding something to the side of something with, you know, a ratchet and bolting it on, that’s what we’re talking about.
The classic example I like to give is sort of the lawn mowing service. If there’s a competing lawn mowing service and they’re mowing the neighbors of some of your customers, if you acquired them, you would end up with more of the same customers in the same neighborhoods. You’d be able to serve more people while spending less time driving between customers’ houses. You could actually become much more efficient and actually do more with those customers you acquire even than the company selling more customers would be able to do with them.
And so that’s where you really can see an advantage in this. And, you know, there’s a lot that is out there, sort of this hustle entrepreneur kind of stuff that’s online, where people are really encouraged to get out there and start their own business. I’ve met many people who’ve gone out on their own with some kind of service.
They start to get some clients, they realize how difficult entrepreneurship is, and then they kind of regret it. Those people are ideal acquisition targets because you can often go to them and say, look, I’m looking to grow my business. I see that you’ve got a business in the same industry. You’re doing the same thing.
Would you consider selling me your business and joining my team? And so you can actually do an acquisition to grow the number of clients you have and take care of a labor problem at the same time by finding some of these, especially solopreneurs who have a little bit of remorse or regret for having decided to take that step.
Some of them may embrace the idea of being able to go back to being an employee and having a little more stability in their income, while you get to grow the business and acquire new customers.
Madeleine: I agree. Love this strategy. I’m so excited about this, being able to really accomplish that dream of growth and do it in a way, like you said, that does not split your attention. I think as small businesses scale, it’s so important to hone in. This is the time to hone in on what you do and do it well, and be able to get yourself into that CEO hat in a very effective way and create a sustainable business that can run. So by growing in this way and getting your whole new book of business, being able to solve that labor model of getting people into your company, I think is such an under-thought idea. I don’t think that’s very common. So it’s so interesting to be able to talk about this.
So what does that pitch process look like? If you have this inkling that you think this person might be a really good absorption tactic to be able to grow your business, what does that look like? What kind of things do you need to prepare on your end, and how do you start making that offer to that person?
David: Yeah. So there are five reasons why someone might want to sell a small, privately controlled business. And I already mentioned that cashing out is not one of them, right? So if it’s a good, profitable business, it makes the most sense for people just to hang on to it. The reasons people decide to sell are burnout, boredom and fatigue, divorce, poor health, a need to relocate, and retirement. That’s the last one. Retirement is also the only one of those five that people plan for.
So if you call up another company in your industry and you say, “Hey, I’m growing through acquisition. I’d like to make an offer on your business,” you may think that you said those words, but what they will hear is, “I just won the lottery. Someone wants to buy my business,” right? Because they’ve got somebody now demonstrating compulsion. Someone’s calling them up out of the blue, wanting their business. And that’s like, “Oh, you want this golden goose I have?” Well, they’re going to do that Dr. Evil impression; they’re going to hold their finger up and say, “One million,” right? And so obviously that doesn’t work.
What works is understanding that most small businesses are not for sale. Okay? So what you want to do is start networking through your industry and just let people know that you are in fact interested in growing and you’re looking for opportunities to grow through acquisition. If a deal makes sense, you’re ready to act on it. So you’re going to have conversations with people, you’re going to meet people, some of these business owners, and you’re just going to let them know, “If you ever think that you might want to get out for whatever reason, give me a call because I’m always looking to grow my business, and I’m not in any hurry.”
Most people are going to say, “Well, I don’t want to sell.” Then one of those personal things—burnout, boredom and fatigue, divorce, poor health, the need to relocate—one of these things is going to pop up in someone’s life. And someone who did not want to sell their business three months ago is suddenly going to be calling you, saying, “Hey, something has happened, and are you serious about what you said? Maybe we could sit down and talk about it.” Then you’ll have an opportunity to talk to this person and look at doing a deal.
David: Here are some of the big advantages that business owners have, especially if you are a profitable, established business owner. Number one, you don’t need to do a deal. People who need to do a deal chase deals, end up overpaying, and end up doing something dumb. If you don’t need to do the deal, your best alternative to the deal is nothing. You just keep doing what you’re doing. You are not under compulsion. They are the ones now who are looking for somebody to take them out of the position that they can’t continue in.
So you don’t need to do a deal. The second big advantage is that you have a demonstrated track record of operating a business like theirs, which means that if you want to approach a lender, for example, you’re going to pass a whole bunch of hurdles that the average person on the street is going to have difficulty with.
You’ll be able to show that lender, Hey, I can already run a business like this. But because you have a track record of running a business in that industry already, the person that is going to be the most likely convinced of how capable you are is actually the seller. And so you could actually say to a seller, I’d like to do a deal as quickly as possible.
If we get the bank involved, there’s going to be a time period for them to do their due diligence. They’re going to have all kinds of conditions. They’re going to stretch this thing out, but you know that I know how to run a business like this. So maybe I could give you some kind of down payment and you could simply do the hold the note or let me pay you over the next couple of years for the balance that I owe you.
And so the people that I work with who are doing these in industry acquisitions, a lot of them have success with giving the seller some kind of down payment. And then the seller agrees to take payments over time, removing a bank from the whole process and simplifying it to an incredible degree.
As soon as you take the bank out of the process—especially for Americans—most people are going to use the SBA program, and the SBA program brings a lot of rules to the deal, certain things they do and don’t like. If you don’t have that as part of the deal, it opens things up tremendously. So you can make your price flexible.
For example, you can say, “I’ll pay you this amount of money, but you know what? After five years, if we still have a certain volume of sales to the people that you’ve brought to the table, I’ll add this bonus.” Right? So if the long-term profitability and benefit of me acquiring your business meets a certain threshold, you can end up with even more money, right? That kind of thing isn’t generally allowed when you’re doing an SBA loan, but you can make any deal you want when it’s just between two parties.
And so, getting it out there—going to places like industry trade associations, local business mixers, wherever you’re going to meet people that are in your industry—just introduce it into the conversation. If you do a deal, and especially if you do more than one deal, what will start to happen is you will begin to get a reputation as someone who is doing these acquisitions. Then what will happen is people will actually seek you out. They’ll hear through their own grapevines about the acquisitions that you’ve made.
The problem with the business buy-and-sell marketplace is that it’s a problem of visibility. So anyone in the public could decide they want to buy a business, and it’s easy to see where the businesses are. I mean, businesses even advertise to make themselves more visible to people, right? So I can see where all the businesses are around me, but from a business owner’s point of view, they can’t determine who the business buyers are.
It’s a matter of solving the visibility problem. That’s one of the things that business brokers do. So the reason that a business owner would go to a broker to sell their business is because brokers will say, “Hey, I’ve got an email list of a thousand people that are looking to buy a business.” Right? Um, and so it’s also one of the reasons that buyers go to brokers, because they just want to meet the business owners that want to sell. But like I said, if you have a profitable business, it means time’s on your side. So you don’t have to do the things that shortcut the process. You can lay the foundation for these opportunities.
You can get out there and talk to people, and you can let the opportunities happen. And when the seller is the one that is under compulsion—if there’s something pushing them to do a deal—that’s ultimately when you’re going to end up with a better deal, which doesn’t necessarily mean a lower price. It can also mean simply better terms, like some of the ideas I’ve given.
Madeleine: Nice. Yeah. Talk more about those successful terms. What have you seen that works really well? How do you set up that transition process? You’ve met that person, you’re able to come into negotiations—maybe it happens. What do those next steps look like in terms of you’ve made the acquisition? How do you transition into that next phase?
David: When you meet the person that you’re going to potentially do a deal with, if you consume some of the content out there, you’re going to hear things like, “Oh, you’ve got to create an LOI, and you have to do this, and you have to do that.” The reality is you just have to come up with a deal. And so if you’re talking with a business seller, what I usually say that people should do is they should come up with more than one solution.
So you meet with the seller and you say, “Look, I’ve looked at the information you gave me. Here are a couple of different ways that I’ve come up with that we could make this deal work.” And so then you can kind of brainstorm a little bit. I recommend a collaborative approach. Selling a business is a difficult thing. It’s impossible for anyone to show me a photograph. Like if you show me a picture of a corner store, I’m going to say that’s a building. And if you show me a plumbing company with a bunch of people lined up in front of their service vans, I’m going to say that’s a picture of people and vans.
So like at its most fundamental, what a business is, is a business is a system where people tools, equipment, inventory, and, you know, what we call capital interact together in some way to create a cash flow. And so a business has more in common with a conductor leading an orchestra than it does with a building or some vans.
And so to stretch the conductor analogy to the next level, imagine a conductor leading an orchestra through a piece of music. Then, another conductor who has never heard the music before walks on stage and grabs the baton from the first conductor to carry on leading the orchestra.
And so you’re like, “Wow, that would be really hard. It would be very difficult,” right? But that’s what’s happening when you buy a business. Somebody has built and developed a system that they’re operating, and you are going to take over that system. In the cases we’re describing here, where you’re doing this bolt-on acquisition, you actually are, I guess, inviting musicians from the next orchestra and having them come over into your orchestra. You now have to onboard those customers into your system and processes, making sure that they’re happy, that their needs are still being met, and that they’re satisfied with the way they’re being treated now that they’ve come on board with you.
And this is the danger in any acquisition: the customers might not like what happens, right? And they’re free to go, largely. So this is going to affect the way you structure the deal because, at the end of the day, what you’re buying is those relationships. The way that you can structure these deals to give yourself maximum opportunity—I’ve suggested multiple offers.
So you might make one offer, which is just, “I’ll pay you X amount of dollars.” Well, that’s the riskiest offer, okay? Because you’re depending on those customers staying with you, and they might not. So that offer is probably going to be the lowest one. Then a different kind of offer might be, “I’ll pay you a small sum of money on closing day, but then I’ll give you a percentage of everything I earn from your clients for the next five years.”
Well, that’s not risky at all for the buyer, right? Because it fully depends on those customers sticking around. If they stick around and do business with me, then I’m going to earn money from them, and I’m just going to give a portion of that to the seller. So that’s probably going to be a much higher-priced offer. Right? It’s going to be more money to the seller because the seller is bearing the risk in that deal.
And then there’s a hundred and one shades of gray in between, where you can mix and match these ideas and concepts about, you know, money that must be paid versus money that’s conditionally paid under certain circumstances. Or, if the seller is joining your team, then their salary and compensation become part of the mix too. You know, how good a job is it going to be? Some sellers might just agree to fold their clients in if you offer them a job under the right terms. In that case, you haven’t really bought the business at all; you’ve just sort of got that new employee, and they’re bringing these clients with them.
So, there can be varying degrees of difficulty or different strategies in doing the transition. This is why, when I describe a sales process, you want to make it collaborative. So much out there about negotiation is about these transactional negotiations, where it’s me versus you, a win-lose kind of thing. The issue with this is that you are going to need the seller’s help to transition those clients over into your business. If they feel that they’ve been ripped off or mistreated in this negotiation process, they’re going to be far less helpful than if they feel like it’s been a good process and they’ve gotten a fair deal.
You’re looking to that person to help you transition these clients from the old way into the new way. There’s usually some kind of transition period that’s negotiated in these deals. Sometimes, there’s even ongoing consulting, or, in the extreme case we’ve talked about, the seller becomes an employee. The SBA rules were just updated recently, but for a long time, the SBA would not do a loan if the seller was going to stay on as an employee in the new business. Some of those rules have recently changed. Under the old rules, you couldn’t do what I’m proposing with an SBA loan; you would have to find some other way to do it.
Madeleine: Interesting. A lot of what you were talking about regarding prepping the customers to be able to come in—about buying relationships—I think the same can be said, especially if you are acquiring a business with employees, making sure that the transition of having employees who were once following a captain of a different ship is smooth. Now they’re yours. So, what kind of tips do you have for those situations where you not only have to onboard new customers and make them aware of the brand ownership change, but also ensure that they are still satisfied? You’ve got a whole other piece of that operational side when you’re acquiring employees.
David: Yeah. I’ve seen a lot of buyers just suffer from a paralysis of fear over the idea that employees are going to quit. I remember one day, I had a buyer-seller meeting between two parties, and it was for a restaurant. The buyer had never owned a restaurant before and asked the seller, “How can you guarantee me that the employees will stay after the transaction?”
I’ve never run a restaurant before, and I’m really afraid about how much I need their help. The seller looked at him and said, “Well, it’s a restaurant. So the only thing I can guarantee you is that a year from now, they’ll all be gone.” See? This was the absolute opposite of what the buyer thought the seller was going to say.
Then the seller followed up and said, “You know, that’s why I have spent so much time developing tools and systems to onboard new employees. I’ve worked on the best ads that work really well to get new employees to apply—the best-qualified people. And I’ve got these training programs that help me get them ready to be productive right away. These are all the things I’m going to be teaching you how to do in the transition period because we have to deal with turnover. It’s just a part of the industry.”
And it’s a part of every industry. One of the things I would say is that if you are afraid of employees leaving because you don’t have any idea what happens in the business that you are buying, then I would say it’s probably not a good choice for a first business for you. I really counsel buyers to buy businesses in industries for which they know something about, or to choose an industry that’s super simple and easy to understand. People always get caught by the things they just don’t know.
Do you want to hear an extreme example?
Madeleine: Okay.
David: Cool. All right. So, every once in a while, you have a flood in your house, like plumbing breaks, or maybe you have a fire. There are these flood and fire restoration companies. You may have seen them working on a house you’ve driven by. These people come in and clean up these messes and rebuild stuff. Ultimately, almost all of the work they do is paid for by insurance companies.
I had a client one day who had done a deal. He left corporate America to buy one of these flood and fire restoration businesses. One of the questions he was sure to ask was about customer concentration. The seller told him that they did business for over 40 different insurance companies, which was true. The guy bought the business. Now, what he did not know, though, is that in the insurance industry, there are these third-party administrative companies that help streamline the management of these remediation processes on behalf of insurers.
So, this flood and fire restoration company, while they did work for over 40 insurance companies, all of that work was managed by three of these third-party administrative bodies. After he bought the business, one of them decided not to do business with him anymore, and he lost over a third of his revenue overnight. This is what I mean by saying it’s the things you just don’t know that will get you.
He went from a business that had over $2 million in revenue to one that had less than $1.5 million. The first thing that had to go was his own paycheck. I spoke to him two years after he had done the deal, and he still hadn’t paid himself a paycheck. He was working full-time for free, working hard on this business. We talked about risk and the way you structure a deal. He had bought the business based on a certain price based on its past performance. He had gotten an SBA loan with 90 percent financing. So, even though there was a small amount of his own money in there, once you owe the bank, you owe the bank. There’s no recourse. You can’t say it’s not fair; you lost a third of your clients. You owe the money.
He was stuck in this over-leveraged position with a huge amount of his available cash flow going to the bank and not to him. That’s the kind of thing I want to help people avoid. If he had spent any time at all in that industry, he would have quickly learned about these third-party administrators.
If you’re daydreaming about a certain industry, like if you think it would be the most ideal and romantic thing in the world to own a little fine Italian restaurant in a cute little mountain town, go work in one! They will literally pay you money to show up on Saturday night and do work. You will earn money while you learn the reality of what it’s like to be in one of those businesses. Then you can decide if you really want to be the owner of that kind of business or if it might make sense to do something else.
Madeleine: Yes. The idealized picture of buying a business is not so glamorous once you actually have to own all the problems that they don’t necessarily disclose in that transaction process.
David: Yeah, it’s true. One of the questions I will often ask buyers when they bring a business to me is, “Wow, if this is such a great deal, why hasn’t somebody in this industry already bought it?”
Madeleine: Yeah.
David: It’s an interesting question, right? Because the people in the industry are the ones who know it best. Sometimes we have a hard time figuring out what the answer to that is. There are legitimate reasons why someone in an industry wouldn’t want to buy a business, but it’s a fun thought experiment to think about.
Madeleine: So, I like to end with a kind of thought-provoking question, and I would love for you to paint the picture of success in your mind. If a business were to go through this process of growth through acquisition, what is that end goal? What does that vision look like? When all of the things align, and you have successfully made it to that level, what does that look like? What do you experience when clients reach that level?
David: Well, what it means is that the business is better able to support the outcomes required by the life plan of the owner. People think a lot about businesses; they think about the numbers and they think about business plans. I think the important place to start is with a life plan. What does your life look like in ten years’ time? I like people to get specific—what sort of income do you want to have? How many weeks off are you taking? What does your week look like? Are you going hiking every Friday morning? Be descriptive. So, that transaction in acquiring that other business should lead you further toward a business that can support that lifestyle goal you have for yourself.
One of the biggest regrets I often hear from people who’ve done acquisitions before is that if they pull it off, they then get the impression that, “Oh, this was easy,” or, “I’m very capable of doing this,” or, “This is a totally legitimate way to grow my business.” They get excited about it, and then they start to spend more of their time focusing on the next acquisition when really what they should be doing is focusing on the integration and making sure everything is smoothed out and operating properly. Their next goal should probably be to strengthen their balance sheet a little more, especially if they borrowed money to do the acquisition.
People who get carried away and do a couple of these in a row almost all say that they regret doing so many deals in a row. They wish they had slowed down, spent more time, and been careful. Remember the very first thing I pointed out: if you have a profitable, successful business, it means you have an unlimited runway. You do not have to do a deal.
A lot of the time, for business people who are eager and energetic and have ambitious goals, the advice is to be patient, strengthen your balance sheet, pay down debt, and amass savings in the bank. Every day, you should be in a stronger position. So, when you talk to someone about doing a deal, this is what happens: you have a conversation with someone, you seriously look at their business, you look at a deal that makes sense, you present it to them, and they’re disappointed. They want more money or whatever.
After you’ve done your work, you realize you can’t pay them more. It won’t make sense for you to do it. It doesn’t make sense for you to pay too much because then you’re basically taking the value of all the work you’ve got to do and handing that money to them. The wise and patient person will say, “No, I’m not going to do that.” That person will then say no to you, and they’ll go off, trying to find a buyer that will do the deal they want. That could take months.
Over the course of the next year, for example, you could end up talking to that person over and over again. It might take you a year before you get to the point where you actually do the deal that you had proposed. It all requires patience. If you don’t have the patience and you become overly eager and start chasing the deal, that’s when you end up doing something dumb.
Madeleine: Be patient. That’s a very hard thing to tell a lot of entrepreneurs.
David: Yeah, I know.
Madeleine: David, thank you so much. This has been so insightful. Where can people learn more about this? What resources do you have available out of the billion that you have? Where would you specifically direct people?
David: If people want to learn more about buying and selling businesses, look me up online on my YouTube channel or the podcast—just look for David Barnett, Small Business. My main blog site is davidbarnett.com, and all the different stuff that I do is centered there. I actually had a new book come out on Labor Day; it’s called Buying Versus Starting a Small Business. It’s already starting to rack up a whole bunch of five-star ratings on Amazon, and it’s a quick read. I would encourage anyone who’s thinking about this to take a look at the book.
I really talk about the pros and cons of buying and starting, the risks and dangers of both, and compare each to how each of them is actually an alternative to the other when you’re looking at deals, business plans, or evaluating startup ideas.
Madeleine: Awesome. Well, congratulations on your book launch! That’s so exciting.
David: Thank you!
Madeleine: Awesome. Well, thank you so much, David. I appreciate it. I appreciate all your knowledge. Being able to share that with small businesses, providing value, and empowering people to make those strategic choices is just a game changer. Small businesses don’t often have access to this level of education. The fact that you distribute it for free in your books and videos is truly exciting for the small business community. So, thank you for all that you do.
David: Thanks for the opportunity to share and reach new people. I have a great time doing this.
Madeleine: Awesome. Thanks so much!
