Proven Podcast - DON'T PURCHASE A Business, Unless… - David C. Barnett

Episode Date: November 6, 2024

In this episode, Charles explores the intricate landscape of business acquisitions with David C. Barnett, a seasoned expert who's mastered the art of transforming undervalued companies into profitable powerhouses. David demystifies the process of buying businesses, providing a roadmap for entrepreneurs to spot and capitalize on hidden opportunities. David's journey from financial broker to acquisition guru showcases the power of strategic analysis and hands-on experience. He unpacks his professional evolution, highlighting how his unique "problem-solving" approach has helped countless buyers unearth diamonds in the rough. The conversation between Charles and David is a no-nonsense deep dive into the core elements of successful business acquisition: accurate valuation, comprehensive vetting, innovative deal creation, and effective transition management. They explore the counterintuitive strategy of seeking out businesses with fixable issues, the art of crafting mutually beneficial deals, and the critical importance of industry-specific insights in today's diverse market. David offers a treasure trove of practical advice, detailing his proven methodologies from reinterpreting financial data to his revolutionary "fixer-upper" business selection principle. He challenges traditional entrepreneurial wisdom, making a compelling case for acquiring existing businesses over starting from scratch. KEY TAKEAWAYS: • Grasp David's "fixer-upper" strategy for identifying businesses with untapped growth potential • Recognize the critical role of thorough investigation in sidestepping costly acquisition pitfalls • Explore innovative deal structures that can align buyer and seller interests • Appreciate the value of sector-specific expertise in making smart acquisition choices • Learn techniques for revitalizing struggling businesses, turning challenges into profitable opportunities Head over to https://provenpodcast.com/ to download your exclusive companion guide, designed to guide you step-by-step in implementing the strategies revealed in this episode. KEY POINTS: 4:55 Business acquisition model: David outlines his unique approach to buying and selling businesses. 9:08 Small business challenges: The conversation delves into common obstacles faced by small business owners. 12:21 Buying vs. starting: A comparison is drawn between purchasing an existing business and starting from scratch. 15:01 Negotiation strategies: The podcast explores effective tactics for negotiating business deals. 17:53 Aggressive offers: David shares insights on making bold proposals in business acquisitions. 20:54 Silver tsunami story: The discussion turns to the myth of the "silver tsunami" in business ownership transfer. 24:03 Insider knowledge importance: Emphasis is placed on the value of industry-specific expertise in acquisitions. 27:22 Operating capital impact: This segment highlights how operating capital affects business valuation. 29:11 Importance of analysis: The conversation stresses the crucial role of thorough analysis in business buying. 34:21 Avoid Instagram trends: Listeners are cautioned against following popular but potentially misleading business trends. 36:33 Visibility in business: David explains the significance of making oneself visible as a potential business buyer. 39:10 Networking strategies: Effective networking techniques for finding business opportunities are discussed. 42:44 Starting a business: The podcast offers advice on the initial steps of launching a new business. 45:47 Networking for business: Further strategies for leveraging personal networks in business are explored. 49:31 Importance of systems: The discussion emphasizes the value of systematic approaches in business operations. 52:27 Selling your business: Tips are provided on preparing a business for sale to maximize its value. 54:52 Managing inventory: The conversation covers effective inventory management strategies. 58:10 Operating manual importance: David stresses the significance of having a comprehensive operating manual for your business. 1:00:01 Seller financing advice: The episode concludes with insights on the benefits of seller financing in business acquisitions.

Welcome to the proven podcast, where it does not matter what you think, only what you can prove. Today's guest, David C. Barnett, proves the opposite strategy wins. After buying, selling, and closing businesses for over a decade, including three dozen during the 2008 financial crisis, David has proven that killing bad deals makes more money than closing good ones. The show starts now. All right, everybody, welcome back to the show. This is an individual that I've been wanting to talk to for a long time. We're talking about business owning.

I'm talking about business buying. We're talking about how the market's changing. David, thank you so much for being on. Charles, thanks for the invite. I love to come and talk with people like this. I'm looking forward to it. Do me a favor. Get the audience a little up to date on who you are and what you do

if they don't know you very well. Yeah, sure. So lifelong entrepreneur, I bought, sold, and closed businesses. I run a business today. So I've seen the good, the bad, the ugly. I was once a business finance broker. So I helped people get business loans of varying types.

which led me into the world of business brokerage. So I was helping people buy and sell businesses. And I was lucky enough to get into that business just on the cusp of the great financial crisis back in 0809. And I did that for about three and a half years. I sold a little over three dozen businesses for other people. And then I left that industry because business brokerage as a business can be very painful. It's a contingency revenue model for the most part, meaning that business brokers get paid when they sell a business for somebody.

And so you can spend a year or more talking with a business owner before they decide to list their business for sale. It can then take you months to get it ready for sale. So to get all the documentation organized, the packages put together, etc. And then it can actually take years, depending on the type of business it is, to really find a buyer, the right buyer, who wants to do a deal and then help the buyer organize everything they need with respect to financing and all that kind of. stuff as well. So it's a very long process. There's plenty of places where deals fall off the tracks. And so it was frustrating for me, all kinds of stories of deals that I worked on for a long time that never came to fruition. I eventually left that business, got into banking. And I was a banker for a few years. And, you know, just like those old gangster movies, they kept pulling me back in. I kept getting

phone calls from people who were trying to work on small business deals looking for help and started to do a little bit of consulting as a side hustle. And then when the bank reorganized, there was an opportunity for me to get full time back into the world of small business deal making. But I did it with a very different business model. So now I help people buy or sell, but I do it as a consultant. And I've got the process kind of mapped out into a series of steps. I have services that I do along each step of the way.

And I borrowed the business model of lawyers and accountants, wherein I do each step with people and I build them for my for my work as I do each step. And so it does a couple of things. Number one, it avoids that huge contingency cash flow roller coaster that business brokers often suffer from. But number two, the people I work with often end up paying me a lot less than if they had hired a business broker or were working with a broker. And the reason is, is because business brokers charge commissions so that they earn a decent

living, which everybody, you know, can understand. But when you understand how many deals a broker works on that just don't, they just don't go anywhere, you realize they have to charge higher rates because the deals that do close have to cover over for the work that went into the other ones. And the difference with me is that every person I work with is paying me every step along the way. And so, you know, the people who successfully do deals end up paying a lot less than if they had done the traditional broker model. And it's working. It's been about almost 10 years.

So it's going well. So a lot of people want to start a business, or they want to buy a business. They don't really know the pitfalls of both of them. And one of the things we talked about right before we came on air was that you just released a kind of a post that gave a shocking thing that a lot of people were like, hey, that'd be really great. Do you ever talk a little bit about the post you just made about how many new businesses

are starting and what your thought. on that. Yeah, sure. So there was data that came out from the U.S. government talking about the boom in new business startups. And they were talking about how positive this was for the economy.

And I went and I looked at the underlying data. There was a report. And one of the things that was not clear in the headlines is that the people who, you know, the registrars of different states and federal levels that record the starting of new entities, they actually classify, startups into two different buckets. There are the repeat offenders. So that, not to say it is a bad way,

but there are certain people out there who are just continuously creating entities. So who is this? Well, these are maybe large corporations who might have a different company set up for every property they own, for example, or what have you. And certain law firms maybe that are helping them do this, right? And so is it really a new business when a big Fortune 500 company creates a new LLC because they want to open up, you know, a warehouse in Minnesota. Like they might create an entity for that, but it's not really a new business, right? And so if you if you kind of look at that and you take those away, then yeah, there is an increase in everyday people kind of starting a business. But the government doesn't record what kind of business those are or what stage they are or what they're trying to do or anything like that.

They just say, hey, a new LLC or a new corporation has been formed. and they just count them, right? And so if you look at the data, what you'll see is that since 2020 and the events around that with the lockdowns and everything, of course, there was a huge drop in business formations during that time. But then the comeback was huge elastic bounce to the upside. And it basically is saying, yeah, there's a lot more businesses being formed. But does that mean there are a lot more active new businesses out there employing?

people or are there businesses, for example, where, you know, someone had a great job, they lost their job in 2020, they had trouble getting a new job. And now maybe they're creating some kind of side hustle or they've been forced to create, you know, because they can't find a new corporate employer. Maybe they put out a shingle as a consultant or something like that. And their accountant told them that they should organize, you know, by registering at LLC, for example. And so, so I related that to my own experience because I live in a town that once upon a time was quite a railway town. And so we had a big locomotive shops here that employed thousands of people. And back in 1989, 1990, it was shut down.

And later, I had one of my first jobs at a university from the Yellow Pages. And I was talking with some of the older guys who were Yellow Page sales reps at that time. I was a teenager at that time, but these guys were in business. And the topic of the big shop closure came up. And I said, you know, that must have been a tough time for you. And they said, no, it was a boom time for us. Because all these people that lost their jobs at the shop, a lot of them got severances, a lot of them got early retirement packages.

And a lot of them were too young to be idle. And they all launched businesses. And so for a Yellow Page sales rep, you know, with 15 pipe fitters being released from the shops and 14 of them decide to open plumbing companies, for example, because it's the same skill set, it was great because all these people wanted to buy an ad in the yellow pages. And I thought, wow. So you can have a local, in this case, it was a localized recession in our city, but it led to a boom in business startups. And so this experience and this learning from these other guys really helped me understand that you can't just look at surface level numbers.

You have to kind of dig below and figure out what's going on. we know that a huge number of small businesses that get started never really make a lot of money. They're just, you know, marginal. You know, people will resort to self-employment if they have no options. And so someone who may prefer to be employed because of the, you know, the benefits of consistent income and health benefits and all that kind of stuff, if they just can't find a job, well, they've got to eat, right? And especially if they're like a six figure person who's used to earning a decent salary, unemployment benefits aren't going to cut it. And eventually your savings are going to run low.

Eventually maybe you're going to start maxing out your credit cards and stuff. So you realize at some point you've got to take action to get some income flowing. And for a lot of people, the sort of last resort of where can I go to get some money is to say, you know what, I'm going to have to create something on my own. I'm going to have to do this. So that's why I say that startup statistics may not always be a sign of, you know, a booming economy. Yeah, I think there's a couple things in there that the audience is going to kind of top into. First and foremost, yellow pages was what existed before we had these things in a digital thing.

It was a paper printout of all the people that were around you. So for those who were paying attention, that's what a yellow page is. Secondly, when you see a huge influx of anything, you always want to have an idea going, what is that? What's going on? Why is that? And if there's this massive unemployment and they can't get jobs, which is what's happening, especially in the tech market right now, people who can't get jobs. These are people who had high six-figure jobs that there's just been huge laidoffs, especially with AI coming in, things are changing. A lot of people want to start a business as if it's not.

For the other side of that with corporations to help people understand, every single property I own, every door is a different corporation. We do this because if Susie Q is an apartment B, she slips and breaks your butt, it doesn't affect apartment C. So we do this a lot. So there is that differentiation. So as people are listening to this going, oh, okay, that makes sense why there are in there. One of the things that we go back and forth on is the idea of should we start a business? Should I buy a business? Now, I'm a huge fan of if you have the skill sets, if you've done it before, if you've scaled things before, I will always go towards purchasing a business, especially if it's ugly before I go to starting a business.

But you've got a different opinion on this. I mean, your book is literally buying versus starting, but you literally have this conversation. Yeah. What are the benefits of buying a business versus starting a business and then vice versa? What would you recommend? Sure. So when you start a business, you never, ever know for sure if you're really going to meet that startup point or sorry, the break even point, right? You start up.

You've got some costs associated with starting up. Then you're going to get some overhead costs, whether you make a sale or not, you've got to pay those things. And with technology and SaaS solutions and all this kind of thing, it's never been easier to start a business. you know, if you just want to think about a basic thing like a retail store, once upon a time, you had to spend $1,000 on some kind of point of sale system. Now you just need to get a tablet and sign up for a square, right? And you've got a point of sale system, the cash registered solution. The whole thing's there just for a subscription. So things are cheaper than they ever have been. But you start to get these overheads in place. You may have to make an investment in something like inventory, if you're thinking about a retail store again. And so you've got this money going out. Then you've got to make sales. And on each customer you serve, you're going to make some money.

You hopefully eventually get to the point where you're serving enough customers. The money that you make on them in that month is going to cover your bills. I still don't really believe that's a break-even point because I say, now you've got to earn back to money you lost before you're at that point to really get ahead and be making some money. And we just don't know when these points are. When you buy a business that's already functioning, you've got customers. you've got sales, you've got relationships there, people who already know that you're there, what you sell. The seller is able to train you in how to operate the business, right?

So you've got some coaching and guidance on how to make it work. And so there's a lot of advantages there. It takes away the customers and sales risk. The sweet spot, in my opinion, is to your point about deals with hair on them, is to find a business that you know has problems, that you feel you've got a background and knowledge that you can fix those problems, but the business still makes money.

Because you're going to buy that, and on day two, you're still going to make money, and you've got basically an unlimited runway now to work on those problems because you're making money from day two. The problem, though, that people run into when they buy a business

is that if you don't buy the business under the right terms and conditions, So if you pay it too high a price, or if you buy it, even if it's a good price, but you get the wrong terms, meaning maybe you have to borrow money under too short an amortization on your debt repayment or something like that, you can put, you can just be trading one kind of risk for another. So you trade the customer risk for what we call finance risk, where now, yeah, you got the customers, but guess what? If you lose 5% of them, you can't make your loan payment. Right, right? that's just as precarious a position as not having customers when you do a startup. Because now you've got this note that you have to pay because you've gotten this loan from someone.

You've got the financing to handle. And if the business collapses, you still got to pay that note. It is what it is. That's the scariest thing when people come in and they ask me to help them buy businesses and we have to do that. I'm like, do you have the skill set? And you said it perfectly. Can you identify a problem in the organization that you have a specific skill set that can resolve that? Like you have experience doing that.

Yes, I'm a fan of buying businesses because there's a little bit of a skill set there, but also I want to cash flow on day one or at least the very minimum, day two. I want to know that things are going well. When you go into that, and I agree with that wholeheartedly, and there are these things where people make mistakes because they don't have the skill set. What is the benefit then of starting? Is it just to avoid that extra overhead or what are you running into? What I like to do, if you've ever read any books about negotiation,

one of the terms that you'll come across is batina, which stands for best alternative to a negotiated agreement. And so when you're negotiating for something, you always want to have an idea of what's my bat an idea. If I can't make the deal work under terms that I like, what else would I do? So if you have a job and you're negotiating to buy a business, your baton may just be keeping your job, right?

So you're always saying, well, today I've got savings in the bank and I have this income. If I don't work out on, if this deal doesn't work out for me, I'm just going to keep that, right? If you're unemployed, your bat anna is going to be a lot worse, right? So you've got to do this deal or else you continue to erode your capital as you eat your savings covering your living expenses. So what I say is that when you're negotiating to buy a business, doing a startup should be part of your batina options. So I'll give you an example of where this can come into play.

You look at a business and the seller thinks it's worth a lot of money and the price is a little bit front. and you look at it and you go, this is a little bit overpriced. And you just ask yourself, what exactly is in here? And what would it reasonably cost me if I wanted to start this on my own? And I see this all the time where people want, you know, these businesses are priced in multiples of cash flow. So people want these high multiples of cash flow. And I'll say to a buyer, like, if you bought all the stuff you needed to run a business

like this. And then you went around and did a really aggressive price promotion. How long would it take you to build a clientele the size that this business has? Now, could we do that for less money than what they're asking? Yes. And could you finance these losses over that period for less money than this person's asking for? And I've had some really, like, crazy extreme examples. I was talking with somebody who was looking at buying an accounting office, accounting and bookkeeping firm. They had a lot of small business clients. And this person had a background in administration for dental offices. And so they were doing bookkeeping and in charge of this type of thing in dental offices. And they liked this particular accounting firm because they had a lot of

small business clients. And I just said, listen, you know, what about this? What if you start started your own and you wrote a letter to a thousand dentists and you said, bring your bookkeeping over to me and I'll pay you $5,000. Right. Now, you, you'd put terms on that offer. What you might say is you might say, you have to sign up for an annual contract. And each year at the end of your contract, we're going to give you a check for $1,000. And over the first five years, you'll get this $5,000.

dollar bonus from us, right? And you're literally in the sales world, we call this buying business, where you just go out there and you make people super ridiculous offers and you just get the volume, right? And I said to this person, like, you would be acquiring these dental offices. You'd be charging them a proper rate. But instead of buying this business, you're just going to be writing the checks to your customers. And you're going to be able to finance the acquisition of this customer pool over a five year period by spreading these checks out over five years. And so, would it cost you less to do that than to buy this business? The answer was yes.

It would cost far less to make this really, you know, aggressive offer. And that's the kind of thinking that I like to employ, you know, a little bit of, let's turn things on their head. Let's ask some really bizarre questions. They'll look at this from a strange point of view and just see if it makes sense. And the business in particular, the bookkeeping business was overpriced. I mean, when I saw the deal, I knew it right away. But the person was really trying to rationalize why they should do the deal. And the reason they were trying to rationalize why they should do the deal is because all they saw was the potential risk of not acquiring that number of clients.

But when you ask a question, like, what if we just paid people to be your client? It starts to give you different avenues or angles of thought. Yeah, it changes the whole ballgame. Well, I'm curious, you know, we're in a market right now where we've never seen this before. Just because we have an aging demographic, we've got the economy changing. I know as of the recording, we're technically not in a recession. We're in a recession. But technically we haven't fully released that we're in a recession.

Yeah, okay. We've got an aging demographic. And their kids have watched them grow this business, put their blood, sweat, and tears into it. And they don't want mommy and daddy's getting older. They're at this boomer age. They're at their retirement age or 65, 70 years. everyone's retiring later at this point because COVID made things interesting. But there's all these businesses that the youth of them, the children, don't want. So there's all these businesses that are

available. And my hallucination is that as the economy goes into a downturn, I'll just call it that for now so people don't pee on themselves, a lot of these kids are going to start running into their parents' business because they're going to have nowhere else to go. You know, they're going to reforming these business, doing all that. But there is this really sweet spot right now of you can get businesses at a significant discount that normally you wouldn't be able to get because there's going to be all these businesses for sale. Are those some of the things that you're starting to experience as well or is this just me from the outside saying, hey, this is interesting. Yeah. So this is the Silver tsunami story that I call it, you know, the idea that the boomers

are at this point where they own all these businesses and they're retiring. So I don't know where this idea came from. And I'm thinking it came from academia. And, The one thing that makes academics different from business owners is that academics all retire at 65. So what they do is they put this lens on the business ownership community and they say, oh, well, they must retire at 65 as well. They don't, right? So if you own a good, profitable business and you're well organized and have systems in place and middle management in place and you can run your business and do it with very little interaction

and maybe run it part of the year from Florida, why would you sell that? because most small businesses sell for like two to four times their cash flow. So if you can keep it running with minimal interaction, you're going to as long as you can. And so most of these businesses are sold by people in their 70s, when they really cannot run it anymore or really don't want to run it anymore. The other thing is that most of the businesses that are owned by baby boomers are not worth owning. so they don't produce enough cash flow to make them worth money.

So that's the other thing. The ones who are doing well and make good money, there has always been a strong market for good cash flowing profitable businesses. And back in a great financial crisis of 2008, 2009, every good business I put up on Bizby, sell got 10 to 30 or 50 inquiries.

So this narrative that there's not enough buyers, that there's businesses available at a discount, is all bold. It's not real at all. There have always been people that want to buy good businesses. And here's the thing, is the really best businesses you will never get a crack at as an outsider. What do I mean? Well, every year, every year the people of a certain industry are getting together at their association. and their gala and their dinner parties or whatever. They all know each other.

So when Mr. Smith, who owns a really great profitable business in a certain industry decides he wants to finally sell, he knows all the players in the neighboring cities and states. So he just starts calling those people and says, hey, would you like to grow your business by buying mine? And the reason why he's going to do that

is because he doesn't have to pay a broker's commission. And he's talking to people who already understand. understand the industry. So it's going to be less work on his part to show them the performance of the business because they're going to immediately benchmark his numbers with their own business performance. Yes. You know, if you own a plumbing business and you look at another plumbing business, you're going to cut through those financials and results so much more quickly than someone who doesn't know anything about plumbing, right? And so the best ones are going to get gobbled up in this fashion. Yes. When you're an outsider, you don't know.

know what you don't know. And listen, I talked about the crazy story of the bookkeeping business. Let me tell you this one. So this guy leaves a C-suite business at a major corporation decides that he wants to get into a business that cannot be delivered by Amazon or done by AI, right? We've heard this kind of thing from people before, right? So he decides to get into flood and fire disaster restoration because he figures there's always got to be hands on the job site and people have to do the work. He finds a flood and fire disaster restoration company and the seller says, we do work for over 40 different insurance companies. Sounds great, right? You got a diversification of customer base, right? He does the deal, buys the business, and never once understands or

learns about these third party administrators. Do you know what a TPA is in the flood and fire restoration industry? No, what's a TPA? So, so the insurance companies, because they don't want to get into the weeds of administrating the claims, hire these third-party companies who basically represent them. So these 40-some-odd insurance companies were actually only represented by three TPAs. So there was a Shado customer concentration. And when he took over the business, one of these TPAs decided to stop sending him work. And he basically lost 15 customers overnight out of that 40 somewhat. And so this is like I say to people, it's what you really don't know. That's going to catch you alive.

Absolutely. And this is the risk of getting into something that you don't know, right? Now, let's say you really thought the flood and fire restoration industry was the right one for you. And you wanted to buy a business in that industry. and you had never been in that industry. My number one piece of advice for people, which is rarely exercised by people that I give it to, is if you want to learn an industry,

the best way to learn the industry is to go work in the industry. So go get a job as a salesperson or something. Absolutely. Or as an administrator in the office, like you don't have to work there long to understand what the business is like and what the good things and the bad things are. And so, you know, the other thing about that industry is that a lot of the time you're running a bank because you got to pay for, you know, materials and labor and all kinds of stuff and wait for a long time before you start to get checks from these, from the customers ultimately who are the insurance companies.

And there's a lot of businesses like that. And again, another problem that I were into is people who don't understand certain basic elements of business like obviously. operating capital, which I just alluded to. And they'll, they'll look at a business's cash flow. They'll apply a certain multiplier to it. And they'll figure that's what the business is worth, not realizing that that is what the value of the cash flow is. And the money you give to the seller is just part of your investment in a lot of these deals. You also have to invest money in your own entity by providing sometimes operating capital, depending on how you structure the deal. whether it's a share purchase or an asset purchase or what have you.

And so people will essentially overpay for businesses all the time. By the amount of operating capital, they have to put into their own entity, because they don't stop and look at it as an overall project and ask them an important question, how much is being invested in total for this cash flow I'm acquiring. And I run into this as well with things like franchise resales, where the franchisor may require that certain things get done in the transaction. Like they may require that certain updates to the look and feel of a location are updated, or there may be fees associated with the franchise transfer,

or the buyer may have to pay additional training fees and all this kind of stuff. And just like I said before about the operating capital, if you end up having to write a franchisor a bunch of checks or a contractor who's going to change the signage at a location or what have you. That's all part of your investment. And so when you look at the cash flow, you're acquiring, it's what am I paying to get this cash flow? That's what I'm buying.

And unfortunately, for a lot of sellers, like it really is going to have to come out of the amount that gets written in their check. But these are the things that buyers miss all the time. What are, how, what percentage of business, I mean, you're doing this for a long time? What percentage of businesses that have been purchases that you're like, you know what? That was a good move.

I would have done that as well. And then they're successful three to five years down the road. What percentage do you think of the people I've worked with? Yeah. That you've seen. Yeah. So the people that I work with who hire us to actually help analyze businesses, I'm happy to say that over half of them don't end up doing those deals.

Good. Because we show them how the deal sucks. And I would love to see somebody not do a bad deal and live, you know, live to fight another day kind of thing. Absolutely. for the people who actually do successfully do deals, you know, not everyone gets back to me or, or anything like that.

But I do have a coaching program for people that want to buy businesses and the people there who buy businesses, I follow up with them because I want to do post-mortem calls a year after they do the transaction. And one of the questions I ask them is, would you consider the seller to be your friend? Right. So you buy a business from someone.

You go through a training and transition period, any misrepresentation, lie, distraction, etc. During the selling process will become known to you at some point after the deal has been done. And I think that that is going to be the biggest influencing factor in whether you consider someone your friend or not. Absolutely. And so what's interesting is, is about a third of those people say, no, the seller is not my friend. The other two-thirds say yeah.

They'll say, yeah, he still comes in with coffee all the time. He wants to know how I'm doing. He's excited to see that things are going well for me. So you certainly can do good deals. I think that the thing that people don't really appreciate, especially if they come from outside of the small business world, is they don't appreciate just how you need to be a master of everything when you're in the world of small business,

people that come from very organized corporate environments where everyone's kind of pigeonholed in their own little area of expertise, they don't really appreciate how you need to learn all of these different things and how a lot of the solutions that you want to put together in business, you know, it's not just what is the best solution. It's what is the most expedient solution using the tools we already pay for. or we know this solution exists, is it really even worth implementing?

And so, for example, I'll get this kind of conversation a lot with CRM systems, right? So everyone's told you need to have a CRM system. And there's a lot of advantages to that. And there's a lot of off-the-shelf CRM systems. You know, if you're a plumber and you get like service tighten or whatever, like it can be really great for your business. But for a lot of other businesses,

they may say, well, you know, this is the cost and then this is the implementation. And we're in, you know, a type of business where, you know, we really don't do continuous business with the same people or we really don't go back a second time or something like this. And they really weigh the pros and cons of why it may or may not make sense to implement such a system. And then they choose not to or they come up with some other solution like, oh, we're going to use a Google sheet. and we're going to create calendar events so that every February we're going to send a letter to people we served in the year before last, kind of a two-year follow-up, right? That's a very simple system. It doesn't really cost anything. It doesn't take much effort to implement.

There's no subscription fee to that. And if you do it, it can be just as effective. And what I've found is that when I talk with people who acquired businesses, is people will be very focused on the tactics. of modern technology and tools that are available. And they'll say, look at this business. You know, the old guy who runs this business doesn't even know you can do this. And there's AI that and there's this little tool and that little tool. And boy, when I take over this business, I'm going to employ all this technology and we're

going to make it so much more efficient because that guy just has a whiteboard and, you know, paperwork orders. And then I talk with them a few months later in one of these follow-up calls and they go, holy cow, are those paper work orders ever efficient? Yep. I had no idea. And people run into this all the time. I purchased a company and it was literally a whiteboard.

It was a whiteboard with magnets. I was like, no, no, we're going to optimize it and all that. That whiteboard with magnets is still there. It still works and it's still efficient as hell. So just because this is this new shiny toy doesn't mean that you want to implement it. I think my question is if I'm going into this and I'm going to buy a business and I'm like, you know, I want to do this, you've been doing this, you've seen this, you've coached people, you've doing for, for quite some time now.

Are there specific industries or niches that are better to get into versus, you know what? The good deals are already, because I agree with you, the good deals are already made before they even come to a broker. Because as someone who has sold businesses,

I don't want to do with brokers. They're not that fun. I'd rather save the money and work with someone and just, it's an easy transition. It literally can happen overnight. It says, here, you got it, have fun.

I'll walk through your own for 90 days. I'll help you through the process. Are there any industries or like, hey, laundromats or whatever it is that everyone is like, it's hot right now on Instagram. that you would recommend to people. Yeah.

So if something's hot on Instagram, I would say away from it. Thank you. Because what it literally means is that there's a bunch of fools with money chasing it, who don't know what they're doing, who are willingly overpaying for stuff, and creating expectations in those industries

on the part of sellers that they're going to get these crazy numbers. So you want to avoid competition. And, you know, Are there deals out there? I would say there are never deals. There are only changing levels of motivation. So because I referenced earlier how businesses sell for relatively low multiple of cash flow. So what that means is if you own a great business,

if you own a business earning you a quarter million dollars a year and you find out you could sell it for $600,000 to $750,000, why would you? That doesn't make any sense, right? You just keep that thing and keep harvesting those profits year after year. What ends up happening is one of the five things that creates a motivation for people to sell a business. And they're all personal. The first one's mental, burnout, boredom and fatigue. So if the business owner gets to the point where he cringes and his stomach tightens up every time the cell phone rings,

like that's the time to get out, right? You don't want the anxiety or hassles of this business, time to leave. So the mental bucket, then there's divorce or health the need to relocate in retirement. Now, of those five things, one is planned for. The other four are not. They are things that happen in the course of our day-to-day lives. So that person with that quarter million dollar cash flowing business who's perfectly happy in their business, you could decide, I want to buy in a certain industry. and you could start networking with people in that industry

and every person you talk to could say, I don't want to sell my business. It's a fantastic business. I love it. And you just, you keep talking to those people and then one day something happens. One of those things happens to that person. And all of a sudden,

now you're having a conversation, not because the business or the industry or the economy has changed, but because something in their life changed. And now they're open to that conversation. And so those, the deals come along. The problem is,

one of visibility. So my buddy Rick was a, has owned many restaurants over the course of his life and cafes. And he was consulting with a seafood restaurant owner. That consulting mandate turned into him buying it. So he bought the seafood restaurant. From the point of view of people who want to buy a business, people who want to buy a business can see the businesses in the marketplace. You just, you know, you drive around, you see businesses, you look at the yellow pages or on Google, you see businesses. Business owners cannot see buyers. From the point of view of a business operator, they have no way of looking outside their window and seeing individuals interested in buying businesses. So, so a buyer is invisible unless you do something to make yourself visible.

So when Rick bought that seafood restaurant, within six months, he heard from three other. other seafood restaurant owners who heard about the deal, who stepped forward and said, oh, would you like to buy mine as well? Because in doing his first deal, he then made himself visible to people in that industry. You know, and there's chatter, right? Like the delivery guy who delivers the fish tells a story to the next restaurant. Oh, do you know they have a new owner over there, right? And then like the word spreads through the grapevine.

And so how do you make yourself visible? Well, you know, people will go to business brokers to make themselves visible to these intermediaries, but you can also just make yourself visible by networking within an industry and letting people know what your intention is. The, you know, business brokers cost money. Sellers pay them a commission, right? And the value proposition that a business broker offers to these sellers is they say, look, if you sell your business through me, I'm going to maybe find more than one buyer who will compete for your business and drive up the price. that's why I will be able to earn my commission. You'll get an overall higher price, right? So if your plan for buying a business is to look at biz by sell and talk to brokers,

just understand where you are in that ecosystem. You, yes, you're having a lot of the work taken care of for you. And if it's a good business broker, then the seller's expectations should be properly set. The package will be put together to help you, you know, triage that opportunity relatively quickly to see if you want to buy it or not, but you are likely going to pay more than if you create a relationship and have those conversations beforehand.

And I always advise people, as a buyer, your only real leverage is not doing a deal. And so you have to know what makes sense for you and know when it makes sense to not do a deal. If you're trying to network into an industry, having done this and having advised, if someone knows that,

hey, I want to be underwater basket weaving industry, whatever the industry is, whatever that niche. How do you advise your clients to penetrate into that and start building those relationships? Is it just phone calls? Is it going to networking events? Is it just showing up? What are the ways that you have found to be effective

to start building those relationships? Yeah. So you want to ask yourself, who are these people? So once you've identified an industry, if you say, I'm interested in machine shops in upstate New York with a certain revenue and employee range, then you can very easily start identifying them specifically. Like you can create a list.

Once you create a list, you can then start to attach names to it. Like who owns these businesses? Or are they a branch of some big company, right? That is likely not going to be prospectively selling to me. And so you create a list. You can then reach out to people directly by telephone. You can mail them letters. You can reach out on LinkedIn, etc.

But you can also do what I refer to as the, value chain play. So all of those machine shops are buying equipment from a couple of different dealers of equipment who have salespeople. So I remember I once had a guy who wanted to buy a sprinkler service and repair and installation business in New Jersey. And I asked him, I said, how many different brands of this equipment are out there? He was like, there's three big brands. I said, great, every one of those brands has some kind of distributor or sales rep covering New Jersey, find out who the individual people are that go calling on all these people. Because if you can create relationships with those 3D salespeople, they know everybody.

Right. And so now you're talking about networking with the people who know the people. My father-in-law runs an auto repair business. And when he wants to hire a new mechanic, he does not post a job at anywhere. What he does is he tells the snap on tool guy. He says, I need to hire a new tech. because once every six or eight weeks, that Snap-on guy talks to every tech in the city, you know, as they circulate, visiting all the different shops, right?

And furthermore, the tech knows the reputations of the, sorry, that Snap-on guy knows the reputations of the techs and, you know, has to been doing business with my father-in-law for a long time, and he's not going to send a dud over, right? Like, he's going to share the news with someone he knows is going to make him look good when that referral comes through. It's just these simple, itty-bitty little things that most people don't know.

So that's when it comes into buying businesses. Your conversation, again, it's buying versus starting. When do you go and say, I want you to start the business? Everyone wants to be something that can't be touched by AI and can't be touched by Amazon

to avoid the AA in this environment. How are people when they go and say, okay, I get it. Starting a business, it's going to be a lot harder. It makes much more sense for me to reach out and say, okay, buy you the business.

the example you gave earlier, when someone comes to you and they say, I want to buy the business and you get them to the point where like, okay, that might be for you, but there's also this. And they decide, no, I want to go down the starting path instead. What are some of the advice that you tell you? So, okay, you're not going to buy a business. You're going to start it. There are people who are terrified. People have never done it before. People who are like, okay, this is my first time. I've got a job and I'm worried about Amazon and I'm worried about what I don't know. What is some of the advice that you give people there where they go and say, okay, I want to start this business. What are my next steps? Or start. Yeah. So,

everyone gets all wound up in the busy work of starting a business. They want to find out how to get an EIN number or how they register their name with the state and all that kind of stuff. Don't do any of that. Okay. Don't do any of that because I've seen people waste weeks and weeks and weeks of their time on a website and logo design and making sure they've got some form filed with the government. What you want to do is you want to create the most basic of, you know, product information or service information things, which is usually. a PDF and then you want to make a sale. So you want to figure out what do I think people want?

And then who might be the one who's going to buy this? You create some kind of document or whatever. And then you reach out to the person you think wants to buy it. And then you try to make a sale. And you talk with them and you have a conversation and you get their feedback. Yes. And if they say, yeah, I want to buy 10, you go, well, great. I'm glad that you like to buy.

10 of mine. Can you tell me how I compare to my competitors? Oh, you're half the price. Well, there might be something you forgot about. Yes. If you're offering the service for half the price of the competitors, right? Or if they say, no, I can't buy from you because in our industry, we can only buy from people that have been approved by our insurance provider because of the way we handle hazardous materials or whatever. And you go, oh, I had no idea these conditions existed in this industry, I better figure out how I'm going to deal with the insurance stuff, right? And again, you don't know what you don't know. And the way that you're going to learn is by having these conversations by the people who are going to be able to make the decisions. And sometimes,

you know, if you can, you want to leverage conversations. What I find amazing is that people will often get advice from people who they really should not be asking for advice. Correct. So, So they have a business idea and then they ask their neighbor about it who's a postman. Nothing against postal workers. But they just, they don't have the right background. But here's the thing, Charles,

is they will not use their personal network in the way it could be useful. So if you were going to decide to open some kind of auto repair related business, go on Facebook and put a post that says, hey, does anyone in my network have experience working in auto repair? Or do you know anyone close to you who's owned worked in or managed an auto repair business. Something like auto repair has such diversified ownership across, you know, the world

that chances are there's someone on your Facebook network who either has worked in the industry or maybe their cousin, brother, neighbor, etc. has. And they can introduce you, right? And most people in the world, if you reach out to them and say, hey, I'm thinking about getting into a business, I want to learn more about it. I heard you had some experience. Would you mind getting on the phone with me for 20 or 30 minutes just to talk about it? Most people are interested in being helpful. Most people would not mind that. So take advantage of your personal network because it can lead you to individuals that can really inform this background information

that we keep alluding to where you can get a better understanding of how a business works. And here's what I've learned. And maybe some of your experience mirrors this. If you see something that looks like a tremendously profitable business with little competition, then likely there's something you're not seeing. Correct. Because in the normal operations of a free market economy, if somebody is charging really high margins and has little competition, that situation will attract new entrance into that market. Absolutely. It'll attract competition. And those advantages will erode.

All of a sudden there will be competition. There will be price competition. The margins will erode. And eventually people end up in a position where solid players who deliver well should be sustainably competitive and profitable, but not crazy profitable. The places where crazy profits live are where

there are sort of these moats or interventions which are often not natural. So things like patents, you know, why are drug companies so profitable? Well, they get this government protection in the form of patents, right? Why are some, you know, device or machinery manufacturers profitable to an excessive degree because their brands are trademarked, their machines they've invented are patented, this kind of thing, right? In the world of small business, you're not. often going to get into those kinds of scenarios.

You could be a monopoly like you're the only taxi company in the small town, but that's probably because the town really can't support more than one. And so you're not going to be able to charge double the rates of other taxi companies in the world. You're still going to be hemmed in by these substitution competitors. You know, that taxi company might have a monopoly, but if you charge too much money, people are just going to ride their bicycles or ask their friends for rides or hitchhike, right? They're going to find ways around your excessively high prices.

I think there's also, you know, you talk about moats. There's, you know, people go in there like, I want to start an Amazon account. And I want to do this on Amazon. I'm like, well, you're going up against someone who's got a decade now of reviews and all that. And they're being rewarded because they've already built into the Amazon system. You're not going to say, hey, I'm going to be five cents cheaper on them or 20 cents cheaper or $2 cheaper than the product. There's a lot more things as you run in.

to that, you know, for, I have a friend of mine who started helping people rank with books. And he was like, oh, well, I can, he's making a fortune. He's crushing it. You know, how does he do that? And I'm like, well, everyone saw the initial, or saw everyone miss the initial that he spoke to every single book publisher that speaks English into the world over the last 10 years. He's already got relationships with all of that. The second thing is his methodology of how he does that is proprietary. So could you go in and help out? Sure. But to penetrate that market, against someone who's that much momentum and that thing's going on, it's not going to happen. You're not going to win against an individual like that.

And I also think it was hugely important when you talked about the main factors of buying a good business or why someone actually is selling is normally, again, that you said those five things. And for me, when I sold my first business, it was I hated my employees. I just couldn't take it anymore. I was like, I was like, I'm done. I cannot deal with them. And I have told this to them.

I've said this publicly a million times. I sold my company because I hated my employees. I just couldn't deal with them anymore. I was like, I just, just pre-Madonna. I'm like, I'm out. I'm going to exit, give me the money. I'm going to put in real estate. My real estate does not have employees.

I'm done. And I explained it to the individual. The person who bought it for me, I told him, this is what you need to do. And he has since sold the company. He sold it for seven times more than I sold it to him. Because I'm like, here, this is how you do it. It's not that complicated.

You get to deal with the children. Have fun. It's your daycare now. And I just said, those are the things that you have to do. But I agree with you, if you're in a situation where you're a business owner, where it's truly systematized because most business owners have no clue about systems,

which truly systematized and they're making a quarter million to half a million dollars a year, they're probably not going to walk away from that. They're probably not going to walk away from that, especially if they can automate it on a higher level, but most business owners don't have any concept of systems. If you're sitting down and you're walking in,

you're like, God, these are the five things I wish clients would know. I wish possible business owners. I wish people, God, just know these five things for the love of everything wholly. What would those five things be that you wish you would say? okay, here, this, this, this and this. Before they came to work with you, you wish they knew that.

Yeah. So run your business clean. So everybody wants to put personal expenses in their business because they want to maximize their lifestyle advantages. And then when they try to sell their business, they want to then say, oh yeah, but we need to add back, you know, my daughter's cell phone bill and we need to add back this trip to a conference in Bahamas, right? And, all this stuff. And let me be clear, a buyer may delve into that hole with you and fully appreciate, understand, and accept everything you've said,

and be willing to pay you the price based on the cash flow you are then creating with these adbacks. You might just have to find the right one. Now, here's the problem, though. That buyer then has to show their banker that all of your adbacks are correct. And the banker has to agree with all the ad backs. and that's the challenge. So I've often said that if you want to run all your personal expenses through and never have a profit every year so that you don't have to pay income tax,

the cost of that behavior. That's a thing? The cost of that behavior is going to be that you will likely be the bank. That you are going to sell to someone who will give you a down payment and you will hold the note on the entire thing. That person cannot get financing for your business. And so, you know, when people hear that, they get all up in arm. but if you want to sell for top dollar and you want to walk away with a lot of money on closing day,

the business has to look good to a bank, not to a buyer, to a bank. So that would be the number one thing. Number two, every buyer is worried that the love and affection of the clientele is towards the owner and not the business itself. So you have to be able to demonstrate that people are not or the business is not relying upon the ownership in order to to make the sales happen. And if you have key relationships, like you'll hear this all the time from people in, particularly like in,

highly technical service or consulting businesses, like a big engineering firm or architecture firm or something, you know, people do business with that firm because they have relationships with the owners. So if you own a business like that and you want to sell, don't be surprised when part of the deal is that you stick around and work there for years. Because the buyer wants you to be there to transfer the goodwill of those relationships over to the new team.

And so that's got to be something that's worked on. Either you work on it today and get your customers used to dealing with employees or you're going to work on it after you're no longer the owner. And it's going to affect the value. Another common issue would be people that are cruising or sliding towards their exit where they take their foot on. off the gas and they try to maximize the cash flow by ignoring or deferring maintenance and capital expenditures. So if you're planning on selling your business in five years time and all of your trucks are five years old, don't think you're going to get top dollar if you're trying to sell

it with a bunch of 10 year old trucks. Because every buyer is going to look at that and go, hmm, if I buy this business, I got to buy a bunch of trucks, right? So you have to operate the business as though you are not selling it. You've got to have normal operating conditions. You've got to repair and replace things per normal. It's also one of the mistakes that buyers make because depreciation and amortization can get added back in this process of creating EBITDA or seller's discretionary earnings.

And those two things are how accountants recognize stuff wearing out over time. And so if you don't realize this as a buyer, you could end up in the situation where part of your cash flow you think you're going to get is actually going to go into capital expenditures. So capx is a big thing. As a seller, you want to make sure you keep up your stuff. Manage inventory properly. So if your business has an inventory, number one, count it. Your accountant's going to want you to count it every year so you can file proper tax returns. depending on the type of business you have, that may not be enough. You want to count it often enough that you actually create information and allows you to manage the business.

So I'll give you an example of where the people fall off the wagon with this. If you are a successful and profitable business, I saw this once with a fireplace business, like a woodstove business. They were very profitable. They've done very well over the years. And they were always going out and installing these new wood stoves in people's homes. and they had these various stove pipe fitting. So there was like a 90 degree angle and a 45 degree angle and a, you know, a three foot piece and a two foot piece and all this stuff kind of plugs together when they install these wood stoves. And, you know, you have to sit down and make a plan of the person's home and what pieces you need.

And so if you don't have the pieces in stock, you then have to make a plan of what you're going to need next week so you can order it and have it delivered. That takes work. So do you know what you do, Charles? if you have a lot of money. You just order a pallet of every part there is. Right. And then your technicians just wander into the warehouse and just pick up whatever they need. Right.

But while that is easy, what it also does is it then creates this huge investment in inventory. And from the look of your financial statements, it now appears that the business requires $70,000 or $100,000 of inventory to operate when in reality, you could be ordering these parts the week before you need them, right? And so a buyer is going to be looking at this business saying, oh, there's this huge inventory investment, this huge operating capital investment that's part of the functioning of this business. When in reality, if you got rid of that inventory and started to use more of a just in time kind of mechanism and you did this a couple years before you sold, you could then demonstrate that the business is very nimble and does not require a lot of operating capital. right? And so laziness ends up making financial statements look worse off than they could be because people choose the easy way. Same thing with receivables. You know, if you don't need the money,

you don't get on your customers. Receivables get later and later. I've seen businesses operate with 45 days of average day sales outstanding. New owner comes in. They based all of their decision making a deal making on that 45-day DSO, they come in and they tell the customers from now on, we're only accepting credit cards within five days of invoice. And the people start to, you know, people who were paying with a visa card in 45 days now start paying in five days, right? Just because of a policy change. And the seller could have done that.

And if the seller had done that, they would have been able to harvest all kinds of operating capital out of their business before it was sold. And it wouldn't have affected the value of it. the business, right? In fact, it would have made it look more valuable because it could be operated with less operating capital. So there are balance sheet things that people can get into. Was that four?

Are you counting? I think it was four. Yeah, we got one more. I got one more. So one more thing that people need to do, you know, to make their business easier to sell, is they have to be able to show a buyer how the buyer will know. how to operate it. So this is your written operating manual, your procedures, and don't think it has to be a big binder with 500 sheets, right? It doesn't have to look like the McDonald's operating franchise guide or whatever they have over there, right? So an operating manual could simply be a spreadsheet with the different function areas in a business, with links in there to Google Drive folders where you keep the different things that you use for that part of the business. But you have to be, you have to be. able to sit down with a prospective buyer and say, oh, marketing. Here's our marketing calendar

for the year. And here's the folder where we have our fall promotion flyers from the past 10 years. And every year we make a new one, but you can look at the past 10 years and give to get inspiration, you know, see what we did before. And this is what we do every year for Valentine's Day on the radio. And here are the last five years worth of ads from the radio that we have here in this folder. And like you show them like this is the plan. This is how we do it. Here's the materials you can work with. You know,

here's all the people we talk to. Here's the radio guys phone number. Here's the designer that we have on Upwork who did our ads for the last two years and can, would be happy to continue doing them for you. Like you, you need to show them. This is how you run the business and it's not all in my head. Because if it's all in your head, that's freaky. The people are terrified.

that they're going to buy the business and then you're suddenly going to become uncooperative, right? And so if they're worried you're going to become uncooperative, the way around that, this is what I tell buyers, is if you're worried about the seller, you need more seller financing. And, you know, all kinds of stuff is created online about how, oh, you know, I bought this business. I got an SBA loan with a seller note for five or 10%. That's bull. Like most of the time when you're doing a small business deal, you want a material amount of seller financing to make sure that the seller is engaged with you and has a reason to continue to

support and and offer advice and guidance to you. So like deals should be 25, 30, 40, 50 percent seller financing. And I see deals like that all the time and people don't believe me. But here's the thing. A lot of this content is driven by people who are involved in one way or another with deals that involve SBA financing. When you talk to people who. are doing deals without SBA loans, you hear things like, I bought the business by giving

50% down and the seller carried the other 50, right? And that kind of deal happens all the time. And those sellers actually have a better note because there's no bank lien. It's just, you know, they can apply their own lien against the assets of the business and they're in first position. And this is something that, you know, sellers often don't think about. But you need to have conversations with your broker, your attorney, your accountant, et cetera, understand that. Selling a business is not like selling a house. You are going to likely be involved in some kind of multi-year staged sort of evolution of this sale. And a big part of the reason why someone's going to want to buy your business is because they can see that you can teach them

how it's run and that you will be around and available, at least for a phone call, when something happens and someone wants your advice and guidance because they know that you're the expert, you have run it for years. There's so much here. There's so many other questions that I have that we could probably talk for hours and hours and hours on the end. How do people track you down when they want to find more information? What is the best way to get access to you?

What are some of the resources that they can do going, holy crap, this individual can probably save something that would be a fatal purchasing decision for me. What are some of the ways that people get a hold of you? Yeah. If you head over to David C. Barnett.com, that's my main blog site. There's a work with David tab and it'll direct you to other websites I have specifically for buyers, sellers, this kind of thing. And if you're just curious about dealmaking in general, just look me up. Just search David Barnett small business on YouTube or any of the podcasting platforms and I'll come right up. I've been making

content for a decade and I think I've got 700 videos on my YouTube channel right now. And there's Playlists that have been organized along different topics and things like that. And I just, if you're interested in this stuff, I know you'll have a great time. I really appreciate coming on. I even picked up a few things. Thank you so much, David. Awesome. And on the new book, Buying versus Starting a Small Business is out now.

So that's on Amazon. And if you enjoy the book, please leave a review. Amazon reviews are a huge thing for, for anyone who's written a book. Absolutely. Thank you so much. All right. The market doesn't care about your business plan or your projections. It only cares about cash flow, proven systems, and real relationships. David proved that good deals aren't found on

listing sites. They're created through network effects and solving actual problems.