BiggerPockets Money Podcast - 517: Everything You Need to Know Before You Buy a Business

Starting point is 00:00:00 On today's episode, we talked to Elliot Holland, founder of Guardian due diligence. Elliot has spent two decades helping people acquire small to medium businesses and walking them through the nuanced due diligence process. And there are two different types of due diligence, right? There's the soft work of going, maybe looking at a business, viewing it toward operations, asking the right questions, those types of things. And then there's the accounting due diligence piece, verifying the financials and that the numbers are what the seller presents them to be.

Starting point is 00:00:30 Today we're going to discuss both of those with a true expert who has deep experience and has built a business over decades doing this kind of due diligence over and over and over again for clients looking at those types of properties. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. I'm Scott Trench and with me as always is my diligent co-host, Minnie Jensen. Thanks, EBIT Daddy. All right, we're here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. Elliot Holland, welcome to the Bigger Pockets Money podcast. I'm so excited to talk to you today. Excited to be here. I'm glad you guys having it.

Starting point is 00:01:06 Elliot, you have a long history in acquisitions and the general due diligence process. I'd love to start off with a hypothetical situation. Say I've heard of a boring business. This is the term popularized by Cody Sanchez. And I decided I want to do it. And I go on a website like bizbysell.com. When I'm browsing through businesses, what should I be looking for right on? Right off the bat, you should be looking for in a due diligence sense, revenues and profits that

Starting point is 00:01:36 don't make sense. But I will admit to you, when you're looking at biz by sell, the amount of data you have relative to what you need to know is so small, you have to sort of have the ability to deal in between the lines, interpolate, and give everybody a bit of grace on that. Maybe it's also helpful to just kind of like zoom out and think about what, why someone would be interested in buying a small business, right? We're buying a small business. I think that a lot folks are thinking about buying small businesses because they believe that there's inefficiencies, old practices, lots of things to change that they can use to then drive growth. And so the historical financial profile of a business is important, but also the correctable issues are what I think

Starting point is 00:02:16 a lot of folks are looking for when they're buying one of these businesses. So how does one approach due diligence from that context, right? I'm not doing due diligence to try to find all the things that I'm trying to do due diligence to find the things that are wrong with the business, but I'm not necessarily changing the valuation of the business based on those things. Those might even get me more excited. So with that framing in mind, how do I think about the process of due diligence in driving value for me as someone looking for an opportunity in this space? So let me answer the two questions that I heard.

Starting point is 00:02:49 First off, why would you buy a business? And second off, how do you look at the historical financials to continue to evaluate and perform due diligence on the business? So first, if you think about it, so you continue working your job or owning your small business is kind of the stay steady option. You can start a business or you can buy a business. Let's just say those are the only three things you have in front of you, right? Well, continuing on with your job or the business you're running, the same revenue, profits, cash flow that you got last year is probably coming this year plus or minus. So you don't have a huge chance to sort of explode this into something bigger.

Starting point is 00:03:24 Start a business. Yes, it could be the next. Airbnb or Amazon, but 90-something percent of these things fail. So you're taking on a 95 percent bet of losing, as opposed to in buying a business, particularly those done by individuals every day using SBA-7-A loan. Those deals 96 percent of the time work. And so whether you want to bet on a 96 percent failure or 96 percent success, that's the difference between starting and buying a business. Now, how do you look at historical financials from a due diligence? perspective to think about how to make good decisions. Well, the thing is, think about a business

Starting point is 00:04:01 with 100 points. And you go through diligence and you find 20 points that stink and 80 points that are great. Well, here's the reality. If you're good, you can fix some of the 20 points to stink, and then that's probably the business for you. If you look at it and out of 100 points, 60 points stink, and you're not good at fixing any of them, then there's not a business you should look at. And so, yes, There's sort of what's there that's not up to par. And then as a percentage of that, how much of that do you think you can fix based on your experience, your energy? And that's what propels people to get into businesses and fix things to improve your return because it's the money podcast. We're here for a return. Yes, we are. You mentioned, and did you say SBA 7 loan?

Starting point is 00:04:48 7A. And so not to bore folks. I don't want to put anybody to sleep, but it's a government-backed loan. So any American citizen can get a loan up to $5 million, 75 to 95% backed by the U.S. government, at your local bank. So circle a mile around your house, the banks that are there, they all do SBA 7A loans, they all do acquisition loans. So it's a loan for the everyday person to get in this game, which is why I like this so much. It's not just for the fancy credentialed folks. Anybody can get into this. I think that this tool, this SBA 7A loan is really important because I talked to a friend the other day, and they are, you know, a little bit bemused or seem like a little bit skeptical of this industry because they feel like at the end of the day, after all this due diligence and everything is said and done, a huge percentage of transactions just end up being at essentially max leverage for these SBA 7 loans, whatever the lender is willing to give on the purchase price of an asset. is that, does that have any truth to it in your experience?

Starting point is 00:05:52 It does, but I don't think that matters one bit. So if I'm a real estate investor, the real estate market is the same way. If the bank will loan X on it, then the market price for it is going to be a function of how likely the bank is to finance it. That doesn't mean you need to buy it. And it doesn't mean you need to buy it at that price. And so even though the bank will finance a deal, that does not mean that you need to do that deal. And people complain all the time and say, oh, the whole market's messed up because it's just whatever the banks will finance. Well, that's every market that everybody is anybody has ever made money in.

Starting point is 00:06:25 Part of the whole thing here is using discretion, using due diligence, using your own skills, getting smart in this so that out of 100 deals, there may only be 10 that you'll like. And maybe only half of those 10 or five, you might like at the price that they're fetching in the market. And then that's what being an investor is versus like a speculator. Love it. I think that's a wonderful framing. Totally respect that answer here. But I think that is also important here to just do one more layer of depth into the SBA 7 loan because this is in practice how a lot of businesses seem to be valued at the end of the day.

Starting point is 00:06:56 Right. So can you tell us what max leverage is on an SBA 7A loan and how that works when someone's trying to buy a business? Sure. So for 95% of the companies that are being bought under this loan, the price of those businesses is three to four times EBITDA. We probably all heard of EBAA interest before or earnings before interest tax depreciation and amortization. a.k.a. profit or cash flow. So here's the thing. The bank will likely loan about three times EBAA on a business they like and a lot less on a deal that they don't like. And so the sort of bid ask, if you think about it, is three times leverage if the business is sort of solid, less than that if the business isn't. And you shouldn't be paying over three, three and a half, four times. EBIDA for any business.

Starting point is 00:07:50 If so, you're being silly. These businesses have some amounts of risk that you should be cognizant of. We're taking a quick break. When we're back, Elliot Holland will let us in on some of the questions you should be asking

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Starting point is 00:10:52 30-day trial at audible.com slash BP Money. Welcome back to the Bigger Pockets Money podcast. Okay, Elliot, once I have decided on a business that I'm interested in learning more about, what usually happens next? And what should I be looking out for in this stage? I don't want to go down some, you know, month-long journey to discover that I could have learned something at the very beginning that said this is not a deal. So once you find a deal that you like, then we just walk you through the process to closing it.

Starting point is 00:11:26 So you will likely set up a call with the seller. So you'll email the broker and say, hey, I'm interested in this business. I want to talk to the seller. So then you'll get on a call with the seller, typically 30-minute call. And what you're going to want to do is two things. You're going to want to ask the questions you want to know about the business. business, but you're also going to try to present yourself as the best buyer for the business. So both things have to happen in that half hour. Then, if you still like the business, you're

Starting point is 00:11:52 going to put an offer on the business. Well, offers in the land of small business acquisition are called letters of intent or LOIs. I have a sample on my website. There's samples on the internet. You can have your lawyer write one up, but you send in your offer, which is a letter of intent. Now, you're not the only one sending in an offer. So other people send in offers, the broker has a conversation, say you need to come up a little bit, hey, you need to change this. And then the broker picks or the seller picks the best offer. Now you have a sign letter of intent and now you're in what's called due diligence. And this is where you have 60 to 120 days to evaluate the business, to finalize the funding,

Starting point is 00:12:32 to close the deal, and to do the purchase agreement with your lawyers. And so successfully, you would have had a call, you would have had the broker do his thing, you would have sent in a letter of intent. It would have been accepted. You would have had 60 to 120 days for due diligence. You would have done a quality of earnings in that process. You would have done a purchase agreement in that process, a few other things. And after you complete that, you actually close the business. Now I skipped over a couple of steps here, but I wanted to keep it high level. That's how it gets done. Okay. That's great. No, I like the high level. I'm sure there's more steps than that. Regarding the first meeting with the seller, You mentioned that I should be asking questions while also trying to present myself as the best buyer. What kind of questions am I asking? I've never bought a business before. So I'm not sure what I should even be looking at. Yeah, so let's use the plumbing example.

Starting point is 00:13:27 So some good questions would be sort of, why does somebody choose your plumbing company over the competition? Why have you stayed just in plumbing and not expanded into other home services, like maybe doing bathroom remodels or doing roofing or HVAC? You're already in the house. Like, why have you chosen not to do that? How do you keep your plumbing labor longer than your competition to have less disruption and less cost in your business? So what you want to do is take that small, you know, half page write up on Biz by Sell, the McDonald's of business listing sites.

Starting point is 00:14:00 And you want to add in questions that are going to actually help you understand how sustainable this business is, how good it is relative to its competitors, and also in that process getting to know the seller. Now, what you don't want to do, don't bring a clipboard with a whole bunch of questions saying, hey, question one is this. Let me write down the answer. Question two is this. Let me right. No, no, no, no, no. Because of the second thing I told you you need to do in that half hour conversation, which is impress the seller that you're the best buyer for this business. Now, part of that is you just have more cash than the rest of the folks. But I don't know anybody that goes in and says, hey, my money bag is bigger than everybody else, choose me.

Starting point is 00:14:40 What you're really trying to figure out and what the seller is trying to figure out is in a seven-figure business acquisition, the seller is going to have some transition period where they're teaching you how to run the business after you've bought it. And what they're trying to figure out is how easy would you be to work with? And if there's any seller financing in the deal, how likely are you going to be to deliver my check on my seller financing? And so that's the other part, which is why it needs to be conversational, sort of like this podcast and not like an interrogation room like on first 48. Who is the right buyer, in your opinion, for that plumbing business? The hungriest son of a gun in the marketplace is one answer I can give you. Why is that, Elliot? Just being hungry doesn't know it does because this process has enough ups and downs that a hungry person that's willing to sort of run through challenges is likely to win this race.

Starting point is 00:15:30 Who's the other one? somebody who already runs a plumbing business or an adjacent business or has domain expertise. Their parents were plumbers or they've been working for a plumbing company. So somebody who has domain expertise is another great buyer for this business. Third would be somebody who's related to or local to the owner. So if you're in, you know, Spokane, Washington and this business is there and you have interest out there, you would be a better buyer than somebody in Atlanta like me buying the same asset in Spokane, Washington. And then the fourth one I'll give you, and this is part of why I like the deal world so much, the luckiest person in the process. Like sometimes you're not the hungriest. You don't have the industry expertise. You're not local. You just got lucky and you played your cards right and it worked out. And so the best buyer can vary because at the end of the day, the seller will have a limited amount of options, typically three to five that they have to choose from. And so sometimes it's like that private equity company, they were a pain in the butt. I don't want to do.

Starting point is 00:16:29 deal with them. That family office, they're kind of sly. I don't want to be working for professional money. And so now we have three what I call S&B small business acquisition buyers. And I'm picking one of the three and off we go. So I guess my question here is like, it seems to me that in our fictional plumbing business, the best qualified person is the owner's second in command that's already existing in the business in many cases. Is that a frequent occurrence or is that relatively rare? It's relatively rare, and this took me a long time in my career to understand. I'm 40. People who are entrepreneurial have tried something entrepreneurial by now. So that 55-year-old, number two, in that plumbing business, that for 25 years never decided to go start their own company, they're not likely to start becoming entrepreneurial now. They don't like risks. They don't like debt. They don't like personal guarantees. They don't like running everything. They don't like managing talent. And so, although they may seem to be the most qualified, they may not be risk neutral enough to do it, which is why this transfer of wealth, people call it the Silver Tsunami, is so favorable for younger, hungry professionals

Starting point is 00:17:39 because somebody has to take on the entrepreneurial risk to get the debt, oftentimes personal guaranteed debt, to do this. And oftentimes somebody who's been sitting in number two has had 10, 15 years to do that already, they're not likely your competition. Does that make sense? So the SBA 7A loan is a personal guaranteed debt. Now, like I said, the default rate is less than 4%. So I don't want to scare anybody, but it is personally guaranteed. And for my real estate investors, you're used to that when you get started, a lot of the debt that you're going to have is personally guaranteed. And when you get to be Warren Buffett size, those personal guarantees go away.

Starting point is 00:18:16 This letter of intent seems like a really critical piece of the puzzle here. And it sounds like I got to submit the letter of intent before I can really parse out and believe the financials. here. So what can I do before I get to expensive due diligence work to suss out any red flags and get confident in a letter of intent? So the first thing you can do is go visit the business and look at what we call key man risk analysis, right? So what does that mean? If a lot of businesses, first time the founder is still the owner, 80% of what's happening in that business is related to the owner who you're buying the business from and then kicking out. And so if they're doing sales, operations, dispatch, if they're the plumbing specialist for weird situations, then they're probably

Starting point is 00:19:07 doing three or four jobs and you're actually not buying a business with $500,000 a profit because it's going to take you four employees to do what the owners doing currently. It's probably a break-even business. So key man risk is one thing you can just look at, but it's not something you can sort of Google the answer to. You got to typically show up and spend some time with the person. Something else you can look at is how solid are the financial systems. So you might not speak accounting speak, but you can say, okay, do they have a single financial system? Is the bookkeeper competent? Is the CPA that does their taxes competent? Is this a system, I think, in a group of people who I think I can get accurate answers from? So that's a second thing. A third thing can be a

Starting point is 00:19:52 huge piece of this, you don't get to EBDAB without getting to revenue. So how consistent are these plumbing customers? Do they have customers from 10 years ago, 5 years ago, three years ago? As opposed to if 80% of their customers have only been with them for

Starting point is 00:20:08 12 months, that's a very different plumbing business than one you'd be far less interested in buying. Those are three things you can look at before you do any financial diligence to kind of kick tires on a business. So let me educate me here on this. If I'm if I'm looking at this plumbing business and I ask a question like, how many jobs did you do

Starting point is 00:20:25 last year? And what was your profit per job? Can you give me three examples of very profitable jobs and three examples of unprofitable jobs? Would that tell me a large amount about that company's financial systems? I get what you're asking. So I would call that a clipboard question, Scott. So like in my Harvard Business School days, if I'm talking to a $100 million business owner, I would start with something like that. But remember, I'm trying to make this person like me. So what I'd probably say is talk me through the average profit margin on the job. And what I'd be looking for is do they have a number? Is it typically based on anything?

Starting point is 00:21:01 Is it consistent throughout their business? And then could I see those same numbers that they're telling me kind of qualitatively in the financials? And then do they even record profitability per job? Because I would tell you probably over half of the plumbing businesses I look at at don't record it in their financials. That does not make them terrible businesses to buy. It just means that that question that I asked, that's talk about the average profitability, maybe the most advanced and specific answer you're going to get. Does that make sense? And then the next question now you're going to ask me is like, well, how do you tell if the

Starting point is 00:21:38 business is super relying on the owner? I think you were going to go there. If that's the case. So part of that is your visit. So a lot of times in this digital world, people want to show up for a half hour, ask some questions, and fly back home. Doesn't work here. Because if the business owner is doing four or five jobs, it might take you a half day or a day of spending time with them to understand all the things that they do in the business. And so if you're so time pressed to get out of there, you're curtailing your ability to do the diligence you need to do. So it's a million dollar acquisition that's very sensitive to cash flow. I would encourage people to spend the time necessary to get the information they need to do a good deal, not a bad one.

Starting point is 00:22:19 Now, let's get complicate this even further. I'm buying a business for three to four times EBITDA with $500,000 in EBITDA, so $1.5 to $2 million purchase price. But the business also comes with a paid off office space that is attached to the business as part of it. How does that work and factor into the SBA-7A loan and the overall purchasing calculation? Two ways. First off, when you are valuing a business, you're valuing everything that it uses to operate. and everything that it has in its sort of ownership. And so there will be people that would disagree with this,

Starting point is 00:22:55 but generally that paid off office space, if it's part of the business and the business is no longer paying rent to anyone because it's paid off, then that actually paid off office needs to come with the business. Otherwise, you'd have to adjust the profit for a market-based rent that you'd have to pay somebody, even if it is yourself, if you didn't buy the real estate along with it. The second piece is when it comes to an SBA 7A loan,

Starting point is 00:23:19 The business portion of the loan is a 10-year term. But the real estate portion can be 25 or 30 years. And if you buy real estate plus a business, you get a blended term. So now instead of having to pay in 10 years, maybe you have to pay in 15 or 20 on a blended basis. And so you get the benefit of the real estate being involved in it because the bank will actually give you a longer term, which means a lower payment. Okay. And how about stuff? Real estate is still challenging, but relatively easy to value, perhaps hopefully for folks that have been listening to Bigger Pockets for a long time, especially. But what about other types of stuff like specialty equipment in a plumbing business or asphalt paving business or something like that? How do I think about valuing that type of, those types of items and financing them, again, using this 7A loan? So it takes a little bit of a different approach, Scott.

Starting point is 00:24:19 And then let me step back and then answer your question directly. So real estate, people are used to kind of stacking value. So this is in there. There's marble countertops. There's a brand new roof. So we stack all that value. And then the value of the asset is like all these things stacked. Businesses are valued at three to four times cash flow.

Starting point is 00:24:43 And so everything that you do in the business, that specialized equipment, I'm assuming you wouldn't have bought it unless you could have gotten more cash flow because why would you buy it if it wouldn't have gotten them working with cash flow? Now, how can equipment get more cash flow, Elliot? Well, you'd only get it if it actually allowed to do things quicker so you could do more of them. It was a better quality so you could compete against your other folks in the plumbing market, for instance, and get more business. Or there was some long-term benefits. So my plumbing jobs last 25 years where the other guys last 10. And so what we look at in businesses is that the value of all of the assets used to create the

Starting point is 00:25:20 revenue and the profits are all included in the sale because all of them are necessary to create the cash flow that we're then making a multiple of to come to the valuation price. So now to your plumbing question. If I'm looking at two businesses, one has specialized equipment, one doesn't. And let's say they have the same profit, same profit margin. Then what I'm saying is actually the one without the specialized equipment is doing a better job of producing cash flow for its asset base. And so I may choose to buy that one instead. Alternatively, if there's two plumbing businesses and this one has advanced assets, I would expect it to have better cash flow in some capacity.

Starting point is 00:25:58 And so therefore, I'd probably be willing to pay more because the cash flow would be more. Was I able to answer that, Scott? Yeah, absolutely. I think I've just perused and seen sometimes businesses that seem to be trading for just the value of their PPNE, their property plant and equipment, and maybe one times cash flow on top of that. And maybe that's how they're advertised at least. So maybe I'm, maybe I'm getting fooled by this stuff because I'm a novice. No, no, no. You're right. So let's drop into that. So just because some crazy broker says that the value should be this crazy funky asset and

Starting point is 00:26:34 one times revenue, that doesn't mean you should pay that. So, Scott, you're right. There's all kinds of wonky stuff on biz by sale and all these business marketplaces that would suggest you pay all kinds of crazy rationales for these businesses. Don't be a fool. Elliot told you three to four times EBIT. That's the market price for 90% of these deals. Now, if you go do something else, don't call me and say it didn't work, right? Because a broker will try to sell you.

Starting point is 00:27:03 Because think about this. So if I'm running a limo company, right? And the market price for a limo ride is 100 bucks. And I have a Maserati, but you have a Cadillac, right? But everybody's paying $100. Why should I pay this Elliott guy more for a Maserati if he's only getting $100 per fare? So these special assets, if they don't do anything to create matter of cash flow, they're fools gold. And there's a lot of fools gold out there.

Starting point is 00:27:29 In fact, a lot of what my business does is help people find fools goal, which is probably why I'm so emphatic about don't be fooled, pay a market multiple. and really check to make sure that the profits the business says are there are actually there. Okay. That's a wonderful answer. Thank you for educating me. I'm learning a lot here. You can tell I don't know what I don't know. And I appreciate learning from the master or we'll call you the EBIT daddy here.

Starting point is 00:27:57 Oh, we need a T-shirt for that. How often, how much can I trust the EBITDA and the financials that are presented on by biz sell when I'm looking at these types of businesses. And even if I get further along, how much can I trust the financials? As much as you can trust the person at the used car lot, aka not at all. And so the reality of businesses is just like the used car lot. First off, the broker is trying to maximize value for the seller. And there's no recourse. You can't take it back. So once they convince you, that asset is worth $5 million and it was really worth nothing because it did not create any cash flow, you can't go back and say, hey, broker, I want to give it back. Where's the return line? Is this like Walmart?

Starting point is 00:28:40 Nobody. That's yours just like the used car lot. And so what I'm seeing is a huge portion, 20 to 30% of these deals have what I call fraudulent EBITDA or bogus EBIT. And part of the game is making sure either you personally or your team has the ability to dig through messy small business accounting to get to the true profits because you can't do. do a successful deal without getting that number right. All right. This is super helpful. And I'm sure we could go for 45 minutes on additional things you could do before we get to this. But let's talk about I now have an LOI and now I'm doing formal diligence. What is a quality of earnings going to cost? What is a quality of earnings and what's it going to cost me to get that done? Why do I need it? So a quality of earnings is nothing more complicated than a mini audit. The reason you need a many audit is because there is no standard of performance for small business financials. Nobody checks how they report.

Starting point is 00:29:42 And so you might get 10 plumbing companies that report 10 different ways, and you would not know it if you had not gone through the analysis of standardizing their financials through this many audit called a quality of earnings. So that's what it is. What does it cost? So if I'm looking at 10 plumbing companies, one might say, I got revenue because my customer whose job I'm going to do in January paid me a check of $10,000 for that job in December. So, 2023 revenue is great.

Starting point is 00:30:11 2024 revenue is going to look worse. Another company will say, I got the cash in December, but I did the job in January, so I'm going to declare the revenue in January. It's those types of problems from the accounting perspective that you're talking about here, right? Yes. And then to double click, one company will take inventory and put it on the balance sheet the way a bigger company would do. Another company would take inventory and expense it through the profit and loss statement right away. And those two companies' financials would look totally different,

Starting point is 00:30:39 even though they might have the same revenue and the same cash flow. And so what you're trying to do is normalize the way that these companies present. The revenue one's a great example. There's cost ones. There's a bunch of things you need to sort of be cognizant. What does this thing cost? Typically less than 1% of your deal. So my average deal is about $3 million. So my cost is around $25,000 to $30,000 for a quality of earning, which is about 1%. You can go a little bit less and you can probably get something for 10 or 15 grand. The question I would ask you is sort of, do you get your bulletproof vests from Walmart? Or if the other side of risk is catastrophic, do you actually pay for something that's going to protect you?

Starting point is 00:31:22 So you're a, you kind of get what you pay for. But about 1% of the transaction values probably fair across the whole spectrum of deal sizes. I believe that it is quite often that the Q of the 80% of the time produces a lower byside interpretation of EBITDA than what the sellers are presenting. Is that what, what do you think the ratio is? Is there a good number of cases where it's actually higher in your estimation? No, 8020 is probably accurate. 80% of the time is less, 20% more plus or minus.

Starting point is 00:31:52 So the Q of E in most cases saves the buyer much more money than its cost because that purchase price is negotiated down as a multiple of the EBITDA presented in the LOI. Yes, absolutely. So we often pay for ourselves. Some of it is in lower negotiated purchase price, Scott. Other parts are because we're an advisory firm on top of just an accounting firm, if I help you figure out that that plumbing owner was doing four jobs and that $500,000 is really closer to $200,000 by the time you hire four people to do the jobs of the seller, then all of a sudden, not only do you get to reduce the purchase price, but you may walk away from catastrophe. And so that's, I saved you $1.5 million of silliness and probably five years of your life.

Starting point is 00:32:41 And so if you look on my website, there's a section of testimonials, not from folks that close great deals, but folks that are happy that they avoided terrible million dollar transaction that would have ruined their financial setup. I think that's really important to note that you're not just going through this to make sure the deal goes through. You're going through this. to make sure that the numbers are what the seller is presenting. I really like what you said, trust but verify. I'm going to go a step further, not being your business, and say, verify. Don't trust until you verify.

Starting point is 00:33:13 You know what, Mindy, I like you already. I'm pretty awesome. You can like me. I'll allow it. But yeah, you have to verify because this is somebody who's trying to sell their business. They're not going to be like, hey, my business is kind of a dumpy business. Do you want it? They're going to be like, oh, look at it.

Starting point is 00:33:28 all of this amazing stuff. Don't look at this stuff over here. And how much of a shortage is there of buyers who don't know what they're doing? I mean, I'm a real estate agent. There's no shortage of buyers in real estate who don't know what they're doing. So this is a business. It's even bigger than real estate. Even bigger, the valuation of the businesses are more volatile. In real estate, it's like it's purchases close to that type of asset in that area. Doesn't fluctuate all that much, 10, 15%, cash flow can fluctuate 40, 80, 100% in a year. And so really dialing in on this is super important because the value of a business that did $500,000 of Castro last year and $100,000 this year is $1.5 million versus $300,000. Same business, same employees, same location,

Starting point is 00:34:18 same name. You bought yourself a crater. The other thing I like what you said, Mindy, is verify. I don't even like the word trust too much. Not in this game. Why? because owners are getting three to four times any profit dollar they can convince you as there, whether it's there or not. So they convince you that those season tickets to the Dallas Cowboys have nothing to do with the business and you should add back that 50 or 100 grand and then multiply at times three. And you don't realize that the only people they take to the Cowboys games are all their customers and their vendors, then you overpay for that asset.

Starting point is 00:34:52 And once you do it, you can't go back to the Walmart line and say, hey, can I, can I give this business back? Stay with us. After the break, Elliot Holland will tell us some success stories and some stories where the outcome wasn't so great. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the

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Starting point is 00:38:11 Let's talk about some stories here. Can you tell us about somebody who got their bulletproof vest at Walmart and regretted it in the due diligence process? Yes. I had a person that came to. me, he wanted a quality of earnings and was debating the do-it-yourself method. And we went back and forth for three or four weeks. He decided to do it himself. It was a $3 million transaction. It was actually a real estate related business. They helped people find places to live. And so this

Starting point is 00:38:43 person went through the process. They were able to get the SBA to finance their deal to your earlier point, Scott. The SBA will finance a lot of stuff that doesn't mean you should do everything. And there were probably 12 things that were missed. I have a case study on my website. We're probably linked to it in the notes that goes through 12 things that he missed in due diligence. And so that meant that they, that he overly paid for the business. It probably was worth 800,000 maybe, something in that realm, but three million dollars were paid. And so that person struggled through it for a year, tried to do everything they could to put the pieces back together and eventually lost the business. So they could have paid me 25 grand and saved a $3 million

Starting point is 00:39:25 loss. And now they're sitting on a personally guaranteed note of over $2 million. And I'm sure they're not thinking about that $25,000 they saved a year and a half ago. So that's one story of the Bulletproofest from Walmart. Is there any recourse for a buyer who pays $3 million for an $800,000 proper business, it almost sounds fraudulent at that big of a gap. So there's not workable recourse. It's very similar to the used car lot, which is why I use that as the analogy. If you go buy a car from the used car lot and you don't realize the transmission's blown and they didn't guarantee the transmission, you can say, hey, used car a lot, you knew the transmission was blown. You overcharge me for the car. But by the time you go through

Starting point is 00:40:15 the legal system and the way the legal system is set up, the buyer is supposed to be smarter than the seller of assets like this. And so the courts don't favor the people who were showing up as bigger pockets but weren't bigger diligence solution providers. And so what ends up happening is, can you actually go to court and say somebody committed fraud and defrauded you? Yes. But small business acquisitions are so fluid.

Starting point is 00:40:44 that the likelihood that you'll win a case is very low and the likelihood you'll get any money from that case is even lower. And so really it's it's verified before you buy. It's just like to use car lot. Now, I'm not trying to scare people. What I'm saying is 100% of the effort that you are going to do in diligence on this acquisition should be done before you buy it. Don't leave things up to chance. Don't be pushed off of a question you need to understand because of time pressure, because of some broker because of some seller, because of some urge to be a million dollar business owner, just think about going off the used car lot with the car where the bad transmission and the engine and what your recourse is there. You don't have much. All right. So let's go the other

Starting point is 00:41:30 extreme now. And we're getting, you know, we're interested in the subject. I'm assuming if you're listening this much to this part in the episode, because you're hoping for the opposite outcome. You're hoping to buy this plumbing business at a $500,000 EBITDA for, or, 1.5 million and then balloon EBITDA to 1, 2, 3 million if you can over the next couple of years and sell it not just for a 3 to 4 multiple, but for a 5, 6, 7, 7, 8 multiple. Do you have any clients that have had that kind of outcome and made the millions or tens of millions of dollars on these types of transactions? There's over 75 clients I've worked with that have done just that, bought a million dollar business, and now it's worth three to five times that, whether they've

Starting point is 00:42:08 sold it or not. There's a whole testimonial page where I have 10 clients. You can actually see their testimonials about businesses they bought leveraging my services to go on to a million dollar success in mass proportions. Let me tell you my story of my favorite one. So one of my buddies bought a business and I call him that because we worked really one-on-one during this process. He was a former kind of technology guy, just some marketing work. He was married, two kids, wanted to buy a business, came to me for due diligence. We went through the process. We found that the broker had overstated EBIDA. So we slowed the process down two or three weeks to kind of work through a new purchase price, work through some of that. And we were able to get to a place

Starting point is 00:42:50 where the EBIDA matched the price that he had said earlier. So he made the acquisition. This acquisition freed him up to leave his job. His wife left her job. They moved to an island off the coast of Belize. They took their kids out there and were sending their kids to a local private school and living the absolute dream. I mean, location autonomy, wealth, running your own business, having the reins of a million dollar plus company, all of the trappings of this. And that whole process took that person less than six months. And so there's dozens of stories, many of them on my website about the successful stuff. And keep in mind, folks, the reason this is so interesting and so tantalizing and why folks like Cody

Starting point is 00:43:37 and Hormozzi and Walker get such an attention is that you can be a six-figure earner and walk into seven-figure million dollar upside if you do this right. That's why we play this game. That's why the investment is interesting. That's why even if you hold real estate, a lot of my customers are real estate investors that are looking to get higher returns. That's why you play this game. Elliot, that was awesome.

Starting point is 00:44:02 I can't even talk. You've made me speechless, which nobody has ever done before because I can talk. talk forever. Where can people find more about you? So go to Google, type in Elliott Holland or Guardian due diligence. If you get anywhere close, my SEO will get you to the right website. My socials are Twitter. So Elliott E. Holland on Twitter. And you can also find me on YouTube at Guardian due diligence for YouTube. Any of those places, you can find great free content. I have one of the largest libraries of free content around small business acquisition and my contact information is at the bottom of my website. We also,

Starting point is 00:44:37 We also offer free letter of intent reviews. Remember the offer letter I told you that you send to buyers to acquire a business. If you go to offer from elliot.com, you can submit your letter of intent for a free review. So that's another benefit I can give the listeners. Awesome. Elliot, this was really information packed. Thank you very much for sharing that. Thanks so much for having me. I really enjoyed it. Thank you, Elliot. And we will talk to you soon. Talk soon. Holy cow, Scott. That was Elliot Holland. And that was fan flipping. fantastic. I absolutely love talking to him. And I learned so much just in this one hour. Yeah, absolutely. I mean, this is another one of those guests that we've had where you're just like, wow, this is a true master in his area of expertise. He's also a salesman, right? This is a product that he sells, and this is how he makes his living. But I was happy to learn from someone

Starting point is 00:45:28 who makes a living in this particular space. As a reminder, Bigger Pocket has no financial affiliation or no prior relationship with Elliot. He applied to come on the show. And and we were thrilled to have him. And boy, did I learn a lot. I just got schooled by somebody who really knows what they're doing in this space. And I have a deep curiosity. I thought I was going to be able to ask good questions in the show. And he was very polite in saying, no, that's a bad question.

Starting point is 00:45:51 Frame it this way. Including a few times where we edited it out, actually, on the show. So wonderful, wonderful guest. I hope people learned as much as I did. And I'm sold on the value of this kind of due diligence and lining up a quality, quality of earnings in the due diligence process there. So really learned a lot today and how that can add a lot of value for someone on the by side. I'll just leave us on this particular point.

Starting point is 00:46:17 If I was starting over or if I was not CEO of Bigger Pockets, this is where I would be spending my time and energy looking to build a career. I think it's a wonderful, wonderful opportunity. I think a lot of people are going to do very well here. And I think there's a great, these great core thesis that, folks like Cody Sanchez and Alex Hormosey talk about. And I think people like Elliot are the kinds of folks that people who want to execute on this are going to need in their court. In addition to some Bigger Pockets, a couple hundred K-K, most likely in cash. Well, Mindy, should we get out of here?

Starting point is 00:46:49 Yes, we should. Scott, that wraps up this episode of the Bigger Pockets Money podcast with Elliot Holland, who is so amazing. He is Scott Trench, and I am Mindy Jensen saying, bye for now, sweet cacao. If you enjoyed today's episode, please give us a five, star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at YouTube.com slash bigger pockets money. Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kaelin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.

BiggerPockets Money Podcast - 517: Everything You Need to Know Before You Buy a Business

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