Episode 264: Buy Then Build with Walker Deibel

Welcome to another episode of the Club Capital Leadership Podcast. My name is Bradley Hamner, your host. On today's episode, we have Walker Deibel. He is the author of Buy Then Build, one of my absolute favorite books. If you've ever considered wanting to be able to acquire a business, well, then this podcast is for you. Walker, he's the Wall Street Journal and USA Today bestselling author of the book Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game. His work has been featured in Forbes, Entrepreneur Inc., Fast Company— I mean, you name it— Harvard Business Review. He's also the creator of Acquisition Lab, the premier accelerator for acquisition entrepreneurship, focused on delivering world-class education, tools, and resources, group coaching, and a vetted community. You're going to get a ton out of this episode. I have gotten a ton out of his book. It's one of my favorite books to be able to share. So I'm really excited to be able to have Walker on the podcast. Without further ado, here's my interview with Walker Dybul.

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Walker Deibel, welcome to the Club Capital Leadership Podcast.

Bradley, thanks so much. I'm a big fan, really eager to be here and chat with you today.

I am pumped to have you. As I was sharing before we hit record, your book has had a huge impact on me personally. We'll dive into all of those kind of things in just a little bit about, uh, my own journey, etc. But for people that may not be familiar with you and your work, we really like to start with background and origin stories. So tell our audience, give us a couple of minutes of your background and kind of how you got to where you are today and how you got into this idea of acquisition entrepreneurship.

Yeah, Bradley, thank you. So, okay, it kind of went like this. You know, along the way, I really was trying to start an existing— sorry, I was trying to start a business from scratch, right? And like many entrepreneurs, right, that's sort of like what you do, especially if you were, you know, coming of age during the tech boom and like the naughts and all the rest of it. Like that's what entrepreneurship is, right? Like starting from scratch. And, you know, I used my sort of MBA time as like a resume shield to try to like, you know, build this company. And I got pretty far, you know, I was pitching investors and like had, you know, a national company that wanted to roll out our product and Long story short, 2 days before graduation, the whole thing, the rug got pulled out from under us. It completely failed. Later, I was like, I'm gonna— like, after some more experience, I was like, I'm gonna do this right. I recruited a Microsoft executive, like, had technology that was developed by very, very established, proven software developers, oversubscribed a capital raise, went through a top 10 accelerator program, and 18 months later, we were completely out of cash with no product-market fit, and it just died. And so I sort of realized that, you know, we all kind of think about entrepreneurship when you go into it. Everyone kind of thinks they're Han Solo, right? You're sort of like flying into an asteroid field, and you're like, don't tell me the odds, like, I got this, right? And you look at the magazine covers, and you look at, you know, Elon Musk and, you know, like Steve Jobs and all these people, and it's like The reality is, you know, we all kind of know that like 10% of startups make it, you know, like generally speaking. And yet we don't really like acknowledge that starting a business from scratch is sort of like punishment for people that don't understand statistics, right? Like it's really hard. And the little thing that made the big difference for me— well, first let me, let me say, so I got my MBA here in St. Louis, Missouri at Olin School of Business. And During that time, this was '02 to '04, technology, Silicon Valley was all the rage. They defined entrepreneurship. They still do. I mean, it's ground zero. But the thing is, is that being here in St. Louis, you can walk around one of the top 10 richest neighborhoods in the country. None of these people are in tech. You're walking around, Whiteown Boulevard is here in Clayton. I would walk up and down it, like the biggest homes, and I would just be like, "What do these people do? Everyone's quiet. They're doing old-school businesses, all the rest of it." And I just realized, "Hey, why don't I go out?" This is right after I finished my MBA. "Why don't I go out and try to buy an existing business? I know they have revenue. I know they have infrastructure. And the biggest thing is they have existing earnings." is what drives historical-based valuations. And I think you can get bank loans around this. And so that, that was just the thing that, that started it all.

Do you remember, was there something that when you had that thought, I mean, looking back on it, was there a conversation that you had, a, a book, a podcast? Like, what made you kind of flip the, the switch?

Well, two things. Let me be very clear, both of my grandfathers ended up acquiring a company. So it wasn't like a completely foreign concept, right? My 80-year-old grandfather used to say things like, he was an officer in the Navy and he would say things like, "The only way you can ever make any real money is to own a business. That's all for today." And he'd sort of walk away. He would have these little lessons. And so he bought a company and my other grandfather bought his father's company. And so it's one of these where starting a business from scratch, what I realized is when we are going out and raising capital, okay, what we're really trying to do, okay, is create an infrastructure that can generate revenue that covers its expenses so that there's a profitable number at the bottom line. That's called cash flow positive. If you don't get that bottom number, it's not sustainable. Right? It's just not sustainable. So as a way of getting around that, it was like, wait a minute, why am I trying to build infrastructure out of thin air? Why don't I just go acquire the infrastructure that's generating the money with the customers and the people and all the rest of it? You know, look, I mean, the other thing, Bradley, is like, when you think about business valuation, right? Like, there's sort of two ways to think about it. And the first is this kind of future-oriented Silicon Valley, high growth. I'm creating all this stuff. And what I'm going to do is, yeah, today my company might really be valued from a historical point of view at $100, but trust me, in 3 years, this company's going to be worth $1 billion. And so I'm going to allow you to invest today at a deep, deep discount, and I'm going to make you a lot of money. You might buy that or not. That's a future-oriented valuation. Whereas a historical valuation is, I'm not a high-growth company. I'm a Subway sandwich shop or something. Maybe I shouldn't say that's a franchise, but I'm just a— The first company I bought was a printing company. So I'm a printing company. I've been around 80 years and my revenue every year is about $8 million. And so It's gonna be historical valuation, especially when the owner leaves and you're buying it at exit.

Mm-hmm. Mm-hmm.

So it's usually a pretty low multiple on the earnings of that business over the recent 12 months, recent 3 years, that type of period.

So one of the things that we're gonna dive into, and I've got some questions around some of the nuts and bolts of business valuations, where to find— because people are like, I don't even know where to start, right, with this. Um, but I think I want to make sure that we've covered very clearly, because your book does an amazing job of this, is the concept of buying a business that is already existing as opposed to the startups, okay, and starting something from scratch, which you already articulated your own journey. I don't know if you call it this, and so I'm curious about your thoughts, but I've heard this wave impact— people are calling it the silver tsunami. Have you, have you heard about this?

Like, uh, absolutely, I talk about it all the time. It's like, yeah, right in my keynote.

Okay, so like you're, you're the person I'm talking about this. So talk about why now, even like with interest rates— and again, that's kind of nuts and boltsy, we'll get there in a little bit— but why now is an amazing time to be looking at acquiring maybe your first business. But for the majority of our owners, uh, or our listeners, they already have a business, and so they're looking to— I would love to own a second business or a third business and go out and acquire something. Why is now such a great time because of this silver tsunami?

In short, Bradley, here's the deal. It Right now is the single greatest opportunity of our lifetime, period. Okay. Here's why. Baby boomers own more businesses than any other generation in the history of mankind. Okay. Almost all of those baby boomers need to retire by the end of this decade. Okay. And so they own— off the top of my head, I forget, but basically, if you drill down into how many businesses, they're retiring at 11,000 per day, and it's increasing. At this massive rate. Now, here's the thing. The number of businesses that they own actually makes up about 48% of the entire US economy. Wow. Right. And so you've got like half— here's the thing. There's 3 things going on here. One, you've got this $10 trillion of business value that needs to change hands in like the next 7 years. Okay. And these are sort of like old economy businesses. They all found product-market fit before the internet. Right. It's just like, you know, lots of tangible assets, you know, try-and-true kind of businesses, right? Salt of the earth and etc. Second, you sort of have this tech wave, meaning again, none of these companies like were using online marketing, for example, or like systems to sort of like get that product-market fit. So, you know, one example would be like when I bought the printing company, there was a few reasons I bought it, but one of them was I saw technology moving into printing, and this was a time, Bradley, when no one was going into this space, right? What I saw was, you know, businesses were, you know, sorry, bookstores were going out of business, newspapers were going out of business, everyone was like, printing is dead. And I saw people were buying digitally printed books on the internet, okay, for the first time ever. And that was actually the driver. What does that mean? Low run, print production with new inexpensive equipment, basically exalted Xerox machines. So we had the internet, we had new systems, and we had, and we had operational routing, you know, from one to the other for the first time ever. That's really what was driving it. So I was like, well, hey, I'm gonna insert technology into this business that I'm gonna buy as a platform. So in other words, whether it be online, you know, marketing or whatever, your social media, you know, whatever the thing is, there's new things to be applying to this. The other part about the tech wave is you can also go out and just buy The 4-Hour Workweek if that's what you want to do, right? You know, you read Tim Ferriss, you're like, I just want to own a website that, you know, I can work, you know, 4 to 10 hours on a week. I did that myself. I bought one at Quiet Light Brokerage back in 2016. I still own it today. It generates $3 million plus in revenue and I kind of work on it on Friday mornings. I don't spend a lot of time on that business. But so it's sort of like you can buy big infrastructure, you can buy tech-based companies that aren't being sold by baby boomers. And the third and most critical thing is that, look, the SBA in 2016 came out and said, look, we're going to allow 10% cash infusion on transactions up to $5 million. Okay. So, you know, like you can buy one of the largest 4% of companies on earth for a cash down payment similar to the average down payment of a house. Okay? Like you can understand that, right? And so the thing is, it's like financing has never been easier to get. Financing for acquiring a business, in my opinion, is way easier to get than running around for, you know, 12 to 24 months trying to give your equity away Why would you give that away? That's the most valuable thing you have. So you get to own all the equity, you get a bank loan, which is the cheapest debt. Footnote, let's talk about interest rates. It's the cheapest out there. And then you've got the tech wave and this, as you say, silver tsunami with the $10 trillion in business value needs to change.

[Speaker:TREY_LOCKERBIE] So there's so many things that you mentioned there that is big. So You and I were talking about podcasts and podcasts we listen to and that sort of thing before. And I think that, uh, some of the podcasts I listen to, you hear acquisition entrepreneurs, but they're in these numbers of tech wave, right? They, they invest in this business and then, and then Salesforce buys them for $200 million. And so it's like interesting on a podcast to listen to that as we're working out, but then you get down and go, well, I can't do that. I mean, this person has got $200 million and he's got a private jet. So it's aspirational. But what I think that people really need to hear is that there is cash flow positive, in some cases boring businesses out there that are just pumping out cash. The owner's been doing it 20, 30 years. And if you go in there and acquire that business with a 10% down payment, again, we'll get into some nuts and bolts on that in a second. And then you overlay a skill of digital marketing, online marketing, something, social media, Google Pay-Per-Click, whatever. And there's an opportunity for you to be able to really accelerate that business and bring it kind of into the 21st century, right?

Absolutely. I couldn't have said it better. I, you know, I think that, you know, I look at it that there's sort of like 4 different business profiles, right? First is this sort of like eternally profitable business. That's where I would categorize, you know, to use your word, a boring business. Like, you know, if you're just thinking about like something that like there's no real growth opportunities, and it's just a a cash cow. That's one of these like eternally profitable businesses. But then you have like a, you know, you've got turnarounds, you've got high growth, and you've got, you know, what I call platform companies. And so, you know, I think the thing is, is that like, yeah, I mean, it's everything from, you know, whoever's laying salt on the street in winter, you know, to, you know, whoever's washing the windows at this corporate building I'm in, to, you know, getting people scheduled on podcasts, getting entrepreneurs scheduled on other— I recently participated in a deal where there was a business that was helping entrepreneurs get placed on podcasts, right? And like all of these types of things are available. The thing that I think most people get wrong, including business brokers, is that if you go in and talk to a business broker and you're like, hey, I'm thinking about buying a business, will you talk to me? First of all, that's hard to get them to talk to you because they're not really economically incentivized to. It's kind of a waste of their time. But secondly, if you do, then the types of questions they're asking are things like, well, what's your background? Like, what industry do you work in? Like, all these types of things. If you say to them like, oh, well, I own an insurance company, they're going to be like, okay. And you just went, right? They're already thinking you need to be put in an insurance company, and it's not completely wrong. However, I believe that people have certain skill sets that they bring to the table, right? You might be a revenue generator, or you might be a profit maximizer. You can still be an owner of an insurance company in either one of these categories, right? What do you do? What do you want to do with your time? And where do you thrive? What are you good at? In other words, what is it that you bring to the table? You don't bring to the table insurance. That's the product, right? You're either selling it or you're running the company, whatever you're doing. And then you need to understand the sort of 4 profiles we just went through and sort of say like, all right, if I think about, you know, am I, am I, you know, you're either an entrepreneur or you're not. We can talk about that. But then, you know, what do I bring to the table? What am I competent at? How do I want to design my life, right? Like I want to work at a 50,000 square foot warehouse in a business park and the only place to eat is like a McDonald's attached to a garage. Are you cool with that? Or do you need to be like a digital nomad? Do you need to be in like a beautiful downtown setting? All these things are relevant, right? And then you sort of say, all right, now I need to look at the opportunity of this, right? The industry and the size are way last.

Yeah. So what I hear in there is to— I think that you did an awesome job of articulating something that I share often. I really hope people pick this up, is that there are, regardless of whatever it is that you're selling, insurance policies as a whole, there's these skill sets that you naturally have and that you could bring into a business that absolutely needs those skill sets. And so if you're an incredible marketer, right? There are these businesses that haven't had any marketing applied to them in years, let alone digital marketing as a whole to be able to bring it up. Let me ask you a couple questions around those.

Can I jump in real quick? Like, I wanna drive this home for people. Like the profile of a baby boomer business owner is someone who, you know, there's sort of a, like a fat cat, gray-haired person whose business isn't growing as fast as it was in the '90s. They're not taking any risk. Risk. They don't have any debt on it because they already put all their kids through college, and they're just, you know, they just sort of have figured out like, hey, I'm X years old and I own a business that's generating about this, and that's, that's what they're doing, right? So if fresh blood comes in, buys them out, jumps in there and leads it to where it can go, that's the little thing that makes a big difference here. Sorry to run.

Yeah, no, that's great. What of the four, um, profiles that you mentioned, is there one, because you're, you're seeing this, this is what you help people to do. Is there one that you see, uh, that the, of the 48% that the baby boomers do own right now, you see the most of? Meaning, do you see more of the platform, more of the turnaround companies, more of a, what, what, what mix? And that may not be a really fair question, may not have a scientific number, but you may have a gut feel of that.

So it's not necessarily a question that can be answered. And the reason why is because the way that I define platform is different. And I call it sort of like platform and acquisition entrepreneurship, right? Versus platform for what private equity would call a platform, which would be the first acquisition of a planned roll-up. Okay, I treat it differently. And the reason I treat it differently is What I just went through with you on the last question was the prep funnel. Like, how do I, how do I understand, how do I identify the right business for me? Right. And I define a platform as a business where the buyer, right, is going to be the right buyer for that business because they can lead the change that needs to happen, or they can change, they can extract the growth. In other words, I, you know, I wear a few hats. I help buyers at the Acquisition Lab. I work with sellers at Quiet where I help them exit their online-based businesses and other things. And the thing is, it's like, I will— like, I started brokering because I want to understand deals more, right? And it's so interesting. I'll take a deal, I'll take a deal, and I'll talk to 2 people about it. This happens every deal. One of them is like, oh my God, I can't believe this is it. Like, am I going to be able to get it? And I'll talk to the other person and they'll be like, you know, This is, you know, like, it's better than like a, like a warm piece of crap, but like not much, you know, and it's the same business.

Yeah.

Yeah. It's literally like, you know, one person can't bring anything to the table where the other can't. Yeah. And so the thing is, is that when you are looking for a business, there's not, trust me, I've tried. There's not much you can do to actually bring that business to you closer in time, other than education and preparation. I promise you that, okay? Because it's all here, it's all in understanding what you're looking at, right? And you kind of have to do some reps. You need to understand the valuation, you understand what you're looking for, you need to look at some deals just academically, and then, you know, get past that analysis paralysis and be comfortable taking that leap of faith that inevitably comes, okay? And so you've got it, you've got to do that. And there's not much you can do to actually bring that business to you closer in time. And so what happens is— Bradley, I lost my train of thought. You're good. You're good. Oh my gosh, what are we talking about? We're good.

We'll edit. Ali will edit all that out. It's no big deal.

Hold on, hold on. So, so, so I can't remember. I'm so sorry. What was the question?

Well, you were, uh, one thing you were mentioning was bringing a deal closer.

Yeah, yeah, I can't remember where I was going with that. I'm so sorry, I ran on it. So, so totally good.

Listen, it's happened to me so many, so many times.

I'm on like 4 hours of sleep.

Okay. So this, this is my invite for you to attend the 2-Day MBA. It is a free event for you to be able to register. It's 2 days. It's August 1st and 2nd. So Micah, CEO of Club Capital, is going to be speaking. One of my coaches, Mike Reed, is going to be speaking. He's awesome. David Peterson, Coach P, is going to be speaking. But if you want to be in a small group of other people who are working to be able to be better business owner. If you just become a better insurance agency owner or a better gym owner or a better behavioral therapy clinic owner, that doesn't necessarily mean that you are a really great business owner. And so go to businessgrowthcurator.com/mba. Would love to see you there. This is actually a really good segue into— I shared with you before we hit record that I had— I began— this is really important, and it was— it was your book, uh, gave me language. Language matters. That I began to self-identify myself as an acquisition entrepreneur. Okay, super important, because I— when I began to accept that as, as like who I am, I then began the process of saying, okay, well, I need to educate myself. I need to start understanding business valuation. I need to start understanding how SBA loans work. I need to start understanding these things that maybe I know enough to be dangerous about, but if I'm actually going to go through. So then I said, okay, well, then I need to set a kind of a bigger vision. I want to develop a holding company or portfolio, whatever the right, best terminology would be, by 2030, I own 5 to 10 businesses because I feel like I have an idea for me personally where my skill set is and where my skill set isn't. Okay. And so therefore it's not— it would be agnostic to the industry specifically, but more so about what that business needs. And so it would become over time a match to say, I know what my skill set is to be able to acquire that. The reason I say that is not so much for, for me personally, I'm just more using my journey as an illustration. For people that may say, you know what, I've always wanted to buy a business. This is really interesting to me. Where do I begin? Okay, yes, pick up your book, of course. But, but where do I actually really begin? Because I feel like I need to— okay, I need to self-identify my own strengths and weaknesses, businesses. I don't even know where to begin, Walker.

Yep. Okay. So it's a good point. So I am so sorry if this sounds like a plug. It's just I wrote the book that I really wish I had in 2004 when I started. There was no information, right? And so, and the thing is, is like, I thought in 2004, like, this is incredible. Like, I have my freshly minted MBA, I'm navigating this like opaque, fragmented, subjective private capital market, trying to find a small business and that has like no data, you know, like, like, how is this working? And I was like, maybe I just do a bunch of interviews right now and write a book on it. And I was like, no, I'm not really on the list of people that are allowed to write this book yet. I need to just like go live it and figure it out. And that's what I did, right, for about a decade. Um, what I would do is— so, so shameless plug, go pick up Buy Then Build. It's like $17. Okay, if it really matters to you, you know, Reach out to me on LinkedIn or something. I'll hook you up with $17. It's okay.

Right. I really, if they're worried about that, entrepreneurship and acquiring business may not be right for them. Let's just be honest.

I think that's true. I think that's true. And get the ebook, by the way, if you want reimbursement, $6.99. But anyway, so, um, you know, so check that out. But the point is, is like, it's like, um, and, you know, HBR Guide to Buying a Small Business came out around the same time. And then there's a certain community in the MBA area called search funds, and they should go read the Stanford Search Fund Primer. Those are really like the holy trinity. Okay. I didn't make that up. That's been said to me, right? So you've got that. And then, so the most common place for most people to go is a website called BizBuySell. Okay. BizBuySell is a great place to just sort of understand, like you can peek through and understand that there's a world out there, right? And you can just look at businesses that are for sale. I do want to, I do want you to understand that it's a great place to go to get first-time exposure. However, I'm not necessarily promoting BizBuySell. Like in other words, if you actually look at the number of transactions that get done on these websites, It's incredibly small. So here's the thing. A lot of businesses are not prepped to sell. Being a business broker is zero regulation. Like literally you don't even need a real estate license level thing. Some states say, well, we need them to have something and they really truly require them to have a real estate license. That's it. Like there's nothing. And so like you've got sort of like, there's a big range in like, business brokers' ability. And there's a big range of businesses. There is very little data, and it's just a bit of a— I'm sorry, but it's a bit of a mess. Okay. Generally speaking. So you can go there and sort of get exposure. But then beyond that, the thing is that you can look at those deals and you can also commonly find brokers in your city, state, uh, whatever on that site. And what you really want to do is drive through to that broker's website and sort of see if you can get on their email list, right? Because the thing is, is that like, I'm not going to tell you that every business on BizBuySell is just, you know, trash. What I'm trying to say is that because of the inefficiencies and frankly, um, uncapableness of, you know, lack of skill and ability with like the, the ability to present these deals and prep them for exit and all the rest of it. A lot of, a big percentage of deals that get listed don't actually sell. Okay. And because of that, all of those deals sort of go through a, like, here's step 1, here's step 2, here's step 3. Some brokers just put on BizBuySell on day 1. Okay. It was when you look at the new deals, if you are looking at BizBuySell, Number 2, if not, they'll sort of circulate their own community, then they might hit their own email list, and then they'll go to Biz Buy Sell. And if it is one of these businesses that is not going to sell, it always finds its way to Biz Buy Sell and stays there for a long time to die. I have bought a company off of Biz Buy Sell. I was doing loose math, maybe it was doing $1.9 million in revenue back then, and I mean, that's doing about $2.7 million. See what I mean? Like incremental growth. Like, you know, I think we're 7 years in. Um, so yeah, I mean, I get educated like that, um, and, and just get some exposure and then really just look for brokerages in your space.

Yeah. So one of the things about beginning to look on those sites that I got from your book. And so, no, it's not a shameless plug. I will plug it for you. It is amazing because it gets into the— it answers the questions. I think you did a great job of going high level and eye level, meaning it gives very tangible, specific things of like, oh, that was actually really helpful for me to start understanding how the SBA works, how to understand valuations work, etc., to understand multiples, you know, and so that's kind of where I want to go next is to help people because we've mentioned it a couple of times and I think that somebody who has not actually acquired a business may not necessarily get some of the language around what do you mean multiples of EBITDA or whatever. And maybe we don't do an MBA level of EBITDA or SDE and things like that, but really around their trading at multiples. And so yes, you get software companies that are going to trade at much, much higher valuations, right? But typically, can you give maybe some hypothetical numbers of the typical businesses that you see in your accelerator that you're helping people with? Maybe give some revenue numbers, maybe give some pre-tax or EBITDA numbers, etc., and give some roundabout multiple numbers.

Yep. So, okay, let's do it like this. Usually I don't care if you're using SDE, EBITDA, adjusted EBITDA, whatever unit of measure. Okay. People like to use them interchangeably. They're actually very different numbers. And they have very different purposes, but it's kind of specific. So ultimately, all of them kind of point to, hey, this business is a black box. How much money does the black box generate? Right. And then from there, there's sort of like, at the end of the day, there's really like 6 things that build valuation. Like, if you really just like freebase it down to its core. Okay. Um, and the two big ones are, um, earnings and historical growth. Okay. These are the fundamental drivers of value that put you in different ballparks altogether. It's like, are you in, you know, are you playing wiffle ball? Are you in, uh, are you playing— right, are you playing minor leagues? Are you in the major leagues? Like, where are you? What ballpark are you in? Okay. Makes sense. Yep. Yeah. Little League. Like, it's like Little League, wiffle ball, you know. And then, you know, AAA, whatever. But then you've got historical growth, meaning like, you know, so what ballpark you're in will tell you what multiple range the market usually rewards you with. Okay. So in other words, if you have a billion dollars in earnings, okay, the odds that you're going to sell for 2 times earnings are zero. Okay. It's like, that's way big. Okay. If you have a company that, you know, maybe is making, you know, $50,000 a year, Okay, the odds that you're going to sell for like 2 times $50,000 are decently good, right? Very small company, like, you know, and part of that is just the risk associated with it. Like, if you have a billion in earnings, like, that's not going away next year. If you have $50,000 in earnings, it might not last 2 years, right? And that's what the 2 times is really suggesting, right? Yep. So I find, you know, we sort of touched on this earlier, like, The little thing that sort of really drove this home for me is that when I was getting my MBA, a business that was doing $1 million in revenue was like laughably small. Okay. Later, after I acquired my first company, it was doing $8 million in revenue. I joined the Entrepreneurs Organization, which I can't promote enough. It's such a great organization for entrepreneurs helping each other. But the point is, Vern Harnish was the founder of that group, and he wrote Scaling Up. And, you know, I've met Vern and all the rest of it. And so he came out with his research that showed that only 4% of companies in the United States ever achieve $1 million in revenue. And I was like, what? That is like such a small hurdle for being totally exceptional. So going back to startups, at the very beginning, we were talking about like maybe 10% of startups make it. What we don't talk about is the 10% that make it, 96% of them never exceed $1 million in revenue. Okay, totally. Yep. So I sort of was like, okay, wait, this $8 million acquisition was maybe too big. I don't have to go this big, right? You know, so I started going lower and I went down to like the one— I really hang out in the $1 to $3, $1 to $5 million in revenue and transaction value. I mean, you know, so I bought a lot of small companies in like the, in like the, like just under a million all the way up to about 3.5, and then of course the 8 and, you know, whatever. But, but, um, so that's, you know, the SBA financing is there for any transaction less than 5 times, $5 million. And so assuming, um, this is a bad assumption, but assuming 1 times revenue as like a transaction price, you know, you can, you know, that's usually going to be like $1, $2, $3, $4, $5 million bucks, right? So, you know, in the Acquisition Lab, in the buy then build model, you know, let's just pick that $1 to $3 million revenue range, because that's kind of a sweet spot. Okay, so it's kind of a sweet spot. Most people can kind of buy one in that, in that space. And also the multiples are very, very approachable, right? Like, so, you know, usually in that range, you go all the way down to again, how many dollars on a yearly basis is this black box generating? Okay. And then we're going to multiply it by something. And that multiple is usually somewhere between 2.5 to 4.5. Okay. And that's for the outer bullseye. And then you bring it in and it's sort of, you know, it's usually about 3 times to 3.6 times, like right in there, often plus inventory, because again, it depends if you're using adjusted EBITDA, SDE, whatever. But these businesses will use seller's discretionary earnings. and they'll treat working capital separately. It's like, well, yeah, you have to have inventory, so you're going to buy that extra, right?

Yep.

But usually it's about 3.5 to 4 times all in with working capital and everything. That implies 3.5 to 4 years of earnings that you're buying at once. So again, it's earnings, then it's how do you get to what that multiple is? Okay. You've got historical growth is the big one, right? So if I've got, you know, a million-dollar business and let's just say it's generating $250,000 a year, okay, in income. So what you would do is you would say, okay, this business, you know, last year was $500,000 and now it's a million in revenue and you better buy it real quick because obviously it's going to be $2 million next year. Right. So the forecast, you know, kind of says like, okay, we're going to do this discounted cash flow net present value recipe, but we don't do that. We just apply a multiple to it. Right, right. So, you know, that might be, you know, let's just say 4 times as opposed to a lower number. Um, on the opposite end, you might be $2 million, then $1 million this year, and it's like, well, geez, that's going right in the tank. So I might go, I might just offer maybe 2.5 or something like that, right? Um, and, and so that historical growth plays a big lever. With it. And then there's other components like, you know, general transferability, documentation, you know, what are the business risks associated with this company, things like that.

Yeah, no. And I mean, from that, I mean, so that's where you talk about, you know, the owner is no longer in the business. And so what's the, what's the predictability of the revenue given the fact that the owner at that $1 to $3 to $5 million or so in revenue, probably had connection with the customers, and so therefore he or she is out. So you can apply a discount on that. You know, they have all these systems, but they're not documented. So you can kind of beat up the valuation there. I mean, we could keep going with that, right?

And again, it's like, like, you know, I'm working on a listing right now where there's one, you know, I think the list price on this business and there's list prices on these size companies, right? The list price was like 1.9. One offer came in. There was multiple offers on this deal because there's a clear growth opportunity, which is well-documented, very clean, easy to run, approachable, good year over year. Went out to market at $1.9 million, which was about 3.5 times. One offer came in at 1.6. 2 offers at $1.9 million, 1 offer at $1.93 million, 1 offer at $1.975 million. And now there's sort of like a final and best round going. I'm not supposed to share any of that, but I know when this is getting published— are we live right now? That's like totally—

no, we're good.

But you know, so there's going to be another round, but you can see like the concept. I'm just trying to quantify how different people approach the same business. And this first guy is saying, like, I don't want to pay anything. Like, this is risky. I'm going to do whatever. Like, this is, you know, and the last guy is thinking what a lot of search fund investors think, which is find the best business you can and be prepared to pay a lot for it. Right. So it's like, on the one hand, there's a few things out there. Like, number one, everyone wants to, you know, wait for a recession and pay pennies on the dollar for a business. I've been through a few of these. That's not actually what happens. We can go there if you want. But the point is, is like, everyone wants to not pay a lot for this muffler. But the truth is, is like, when you find a good one, like, that's a good one. Like, get ready to buy it. Right. You know, and then the other thing is like, a lot of people are like, I don't want to use brokers. I want to go find off-market deals. It's extremely inefficient. It takes years. There's no one to coordinate the deal. There's no one to explain to the seller, listen, you're only going to get 3 times earnings. On this business. They don't know how to calculate the earnings. Like, all, you know, so there's, there's— it's everything is in your best interest when you're talking to someone off-market. But when they are discussing the transaction of the most valuable thing they know, what do they do? Yeah, the CPA. Maybe they talk to their insurance provider. How do I do this, right? Ultimately, they find a business broker, an M&A advisor, an investment banker, who says, okay, here's, here's around the value of your business. It's approximate, it's a range. Let's, let's go to market and see what we can get.

One thing that I wanted to share, whenever I started to dive into this a couple years ago to even consider it, one thing that was really interesting to me, and now looking back on it seems so obvious, but I just want to carve it out. Let's just use an extreme example. Mark Andreessen. Andreesen Horowitz. I mean, these, the VC guys, the PE guys, they're not even remotely interested in your company unless it's $10 million plus, basically, on a super high growth market. So therefore, the businesses that are in that 1 to 3, unless there's just some crazy opportunity that's there, they're not even going to be sniffing around in any of this. And so therefore, And that was one thing I wanted to get you to be able to kind of share your thoughts on. And then the second part of it is, is it was really confusing to me at first. I thought, wait a minute, as the revenue and the EBITDA profit go up, the multiples were going higher. And I thought, wait a minute, what? That doesn't make sense to me. So a business that sells at 30, now I kind of understand it because they're like, no, no, it's predictability, reliability. The due diligence costs are going to be the same regardless. And so they're going to put their money in, into this bigger thing. They're just not going to waste their time. Can you speak about those two things? I think it's important.

Sure. I mean, I mean, you know, I mean, the easy way to understand it is institutional capital, right? Like, like the, the true middle market, um, it's debatable where it starts, right? But, but it's, it's, it's truly like, you know, $25 million in revenue to like $250 million. That's called middle market. Okay. And usually above that, it's like most of those companies are publicly traded, you know, or they're very famous because there's not— there's only a few of them, right? And then sort of below $25 million is kind of a— I don't know what to— how to describe it. There's too small for people to be deploying capital. Let me say it like that. So institutional capital, private equity, What they do is they raise a whole bunch of money from other people and they say, hey, I've got this investment thesis. So now I've got this, you know, like last I checked, it was like, you know, $14 billion or something like that. Like just in like FBA Amazon roll-ups, right? I mean, it's like massive amounts of money. And so they need to deploy this capital once they get it. The big thing is that they want to, they usually pick a vertical and then they go and they just acquire a bunch of companies in that vertical, and then they sell it to another private equity company, or they take it public, or whatever it is.

Yep.

Those businesses, the, those private equity investors are really looking at companies that, um, that have like $2 million in adjusted EBITDA or higher. $2 million is kind of low, right? That's, that's the sort of like bottom of the barrel for institutional capital. And the big thing is they've got all this money right? Like, it's not a big fund that is $100 million, right? Trying to buy a few assets that they can manage with on less time so they can scale, right? And so they're looking for companies that, you know, maybe have $10, $20 million, right? And venture capital is private equity. It just has a different investment thesis, right? Right. And so, you know, when you start to get down into these like low-growth companies with less than $2 million in earnings, That's where you start to say like, oh, okay. To your point, if a company has $1 million, remember we talked about the black box having earnings, however you want to call that. If black box is generating 7 figures in annual earnings and there's historical proof that it's pretty stable, pretty much the floor for a business like that is going to be like a 4 times. So like $1 million. Okay. Yep. Once you go below that, I'll even say it's like getting a 4x is almost a ceiling. And the little thing that makes the big difference there is actually the type of buyer that's coming in. And they often will use different terms of a deal. So one of the things that I do, if I'm writing someone a check for, if I'm buying a company, let's just hypothetical, I'm buying a company that's generating $375,000 in earnings a year, and I'm getting a loan, a 90% loan, by the way. I'm writing a check for $1 million. I borrowed $900,000 of it. I put $100,000 in. It's generating $375,000 a year. Okay? Yep. You can do that math if you want. It's basically a 300% return cash on cash. Sorry, I'm misusing that. Let's call it IRR. Okay. Yeah. In terms of internal returns. So when I do that, I'm going to pay— I'm going to be paying like a 3 times, right? Yep. Because no one else is buying that thing. Right. But then once that business gets bigger, and you're at a million now, it's going to be like a 4 times. Yeah.

So I want to ask around and I want to be respectful of your time, but I do have to ask, do you think that buying and evaluating businesses helps the entrepreneur become a better entrepreneur because they see the business totally differently? Have you ever thought about that? Like you just begin to approach it in a different way about like what actually increases value in the business and you become more skilled because you're actually saying like, oh, okay, now I actually know what it takes to take this business from 1 to 2 and or from half a million to 2, etc. Like I, it is, it has helped me to be a better entrepreneur in even looking at some of these deals because I just see it from a totally different lens. Has that been your own experience or the, or for the, the people in your Acquisition Lab?

Bradley, like it was Father's Day this last weekend. I can't even go get barbecue without trying to figure out the business. Like, I'm looking at the tickets, I'm looking at how many people are staffed behind the counter, I'm looking at the line, I'm looking at how many tables they have, you know, it's just sort of like, what's the marketing? Are they like, you know, the big thing in barbecue is like, are they pushing the smoke out the— I don't even know if it's intentional, they push that smoke out there and you're like, but your car just pulls over, you know, even if you're right, like tribal, right? You know, so absolutely, you know, in other words, I think that you think a lot about, you know, I talk a lot about Porter's Five Forces, right? So it's a very standard, like MBA first year, you know, core kind of concept that Michael Porter at Harvard University came up with. And, you know, people I went to school with are like, you know, you don't actually use like Porter's Five Forces, do you? I'm like, dude, every day, like every day, because it's such a good model to figure out, okay, I'm just going to look at a business, where's the power lie, right? It's a pretty easy checklist. Is there supplier power? Is there customer power? What's the threat of new entrants? Like, is it, is it really competitive? Is it, you know, do you have a monopoly? Like, it's pretty easy to sort of say, like, where's the power lie? Because that's the person that has the leverage in the business model, right? And in my opinion, that's actually the best way to figure out risk in a deal, right? So let's pick a very specific example. I'm gonna sell, I'm gonna resell, I don't think you can do this, I'm gonna resell Apple iPods on Amazon. What value am I providing? Not much. I'm somehow, I'm doing something with arbitrage there, but I have supplier power with Apple or wherever I'm getting these things, right? And Amazon has supply, has, I call it platform power, Right. I—

yep.

Yeah, it's sort of like, you know, they're controlling all of the customer interaction. So like that business, you know, you know, just go back to multiples, should not sell for a lot. There's no intrinsic value, right? Yep. You know, so we'll leave it at that.

Um, before you go, I do want to ask around financing.

We—

what has gotten mentioned is around SBA, but I think that one of the levers. I'd love for you to kind of walk through a quick framework for people to even think about financing, because obviously the first place people go to is, I'm not sitting on $1 million cash.

Yeah.

So SBA, but also like seller financing or owner financing, owner financing, things like that. So, so give people that quick framework there.

No, thank you. And that's, that's also what I meant to mention with institutional buyers. Like, so I might write a check for $1 million. I'm like, here you go, see you later. Like, give me 30 days of training and get out of my way. And I don't want to hear from you. I don't want to write you checks later. It's just how I do it. Institutional capital will do all kinds of deferred stuff. Like, they'll be like, all right, we're going to give you different payments on the working capital amount, the inventory amount over time. We're going to insert earnouts, which will reward you for upside performance that we have, but we want to keep you involved. We want to give you— Maybe there's even, I keep you on and it's pay and bonus. That's rare. But, but, you know, and then there's seller financing, which is where the seller becomes the bank. We talked about a few things that most buyers think they like, okay? Not using brokers, you know, all these types of, I feel exactly the same way about seller financing. Okay. And it's, and it's, it's not a popular concept. Because people love the fact that they're like, oh, I'm gonna walk into this business and I'm gonna use the seller as the bank. Right. And then I'm gonna get their business and I'm just gonna pay them or have the business pay them over time. Okay.

Yep.

Look, people win the lottery. It happens every day. Somebody wins. Okay. Things like that happen. However, if that is your business plan, I would say, don't go to market with that as your business plan. Because you're more likely to move to Hollywood and become an A-list actor. Like, it happens, okay? But it's, you know, it's also like Steve Jobs is on the COVID of a magazine because he is absolutely exceptional. It's these types of deals that are so exceptional that when they are heard of, it's like, oh my gosh. Most deals that are going to have seller financing have a personal guarantee anyway, okay? You're not getting around a personal guarantee by getting around the bank, okay? Usually in a deal, seller financing is I'm going to the bank, I can get all the money, but for some reason I'm preferring as the buyer to get, say, a 10 or 20% of the purchase price as a seller finance. And what I'm trying to do is attach the seller's interest to my interest. Okay, here's the truth, here's the truth. I'm buying your business for a million bucks and you get $900,000 at closing, and I'm going to pay you another $100,000 over the next 10 years. Probably you don't really care. Like, you want the money, but like, if you're gonna take that deal, it's because you're okay with the $900,000 at the end of the day.

Exactly. Yeah, yeah, yeah. And I think that that actually is something is really important for people to get, is that they get fixated on the price, the, uh, what the asking price is.

Yeah.

And yet the probably just as valuable is the terms of the deal, what the actual terms of it are, which is not discussed as much, right?

Yes, the terms are a big— are the thing. Like, yeah, I mean, I've worked on, you know, um, you know, 7-figure transactions where the seller, the day after closing, has low 7 figures in their pocket. Yeah, I mean, you know, and that's ultimately what you're talking about, right? It's sort of like How do I buy it with less money? And, you know, they like— it's, it's terms, and multiples get really big when terms get really good. Uh-huh. There's a lot of misinformation out there, like people like, oh, I'm gonna come in and buy this company for 2.8 times earnings, and like, I'm gonna do the whole thing with no money out of pocket and like seller financing. And it's like, the only person who would take that deal is like a widower whose spouse just died, who is the CEO of the company that they own. They don't know what to do with it, and they literally have no idea what to do?

No idea. Yeah.

So if you are literally taking like a— I am a zero out of pocket, no cash down, 100% non-personal guaranteed seller financing acquisition entrepreneur search, then you need to look for people that are dying. You need to look for people that are getting disabled. You need to look at people with drug problems, right? And what's the other one? It's like divorce, right? You need to be right there. You need to be the warm stove when all of these things happen around the business people. Or right around business owners. That's, that's actually when it happens. Anyone who has 3 months to figure out how to sell their business, you know, is going to go to someone who can help them do it. At least they should, including insurance owners. Yes, right.

I think we should have scheduled this for 3 hours and I would have just made it a 3-part podcast because it was like I had— then I could have so many questions around this. All right, listen, people who have said, I am super interested in this and they want to learn more, obviously, where would you point them to on the website? And then obviously about Acquisition Lab, but you've got a great video series too people can opt into. So where would you point them to?

Yeah, thanks. So you can go to buythenbuild.com. There's plenty of free resources there, including video series. We have a newsletter even that comes out every week. I've got a YouTube channel. I try to make a video about obscure things around deals once a week. There's a Facebook group, a Buy Then Build Facebook group with about 9,000-10,000 people in it. Deals are happening in there. Okay. They really are. People are getting deals done. Those are some great free resources. I built the Acquisition Lab because I was like, I don't— like, there needs to be some way for business buyers to basically get buy-side advisory services in small groups. Right. And, you know, this is not your standard coaching program. We really, we vet to the point that 75% of people that try to, that apply don't get in. Um, and, uh, so we've got an amazing group of people that I can't even believe I'm a member of. Um, you know, we've just, it's education, it's world-class education. I won't go into why, um, uh, a vetted community, tools, resources, supplier network, and the tools that you need, right, in order to get these things done. So You know, the biggest thing in my opinion that we do is we help people get out of their bedroom or their living room. And then a group of people that are trying to tackle something, surround them with world-class education, the same, you know, language and terms. And then we just bury them with coaching. And we have acquisition entrepreneurs, successful AEs that are coaching every single day of every single— oh, well, not the weekends. And then I run, I run the search forum every other week where we just go deep on, uh, 3 deals at that time, but just member stuff.

So, man, that's awesome. That's awesome. We'll put the link in the show notes and in our email that goes out as well. Walker, this has been awesome. Thank you so much for your time.

It's been great, Bradley. Thanks for having me.

Well, that was awesome. I hope that you got as much out of that episode as I did. And maybe I'm just a business geek about these type of really truly pick up his book. It's been a great read for me. I've read, I think I've read it, gosh, 2.5 times maybe, at least at this point. And definitely take a peek at Acquisition Lab. I don't even know where to begin in terms of just kind of key takeaways. I think mostly for me, because I've read the book, because I've been studying this for the past few years myself, I think he just reiterated some points. I think he makes it to where acquiring the businesses in that $1 to $3 million range accessible, it makes it possible. I'm not going to play in the space of $10 million, $20 million, $30 million. I mean, look, maybe one day I'm just not there. But, you know, being able to acquire some of these businesses that are spitting out some cash profit, utilizing, you know, my skill, but for you, you— the skills that you love to do.

Or you're—

he mentioned revenue generator or profit maximizer. I think that was an interesting way to look at it.

I mean, what—

are you a top-line person or a bottom-line person? Consider that for yourself. Uh, go to buythenbuild.com and take a look at the, the free resources that they have. Big shout out to our podcast sponsors Club Capital, Autopilot Recruiting, and Coach P Consulting. Look, we're talking about financials quite a bit with Club Capital. And so maybe you want to be able to increase your financial— your margins in your business so you can take home more money, have some cash that you can then deploy into another business. Go to club.capital, book a no-obligation demo, and speak with someone so that they can help you to start to develop the skill sets to one day be able to possibly pivot that and acquire that, uh, use that skill to be able to acquire multiple businesses that are going to be able to spit out more profit. It becomes like riding a bicycle. You will know how to do it and you just apply it, uh, point it in the different direction of another company that you may have. Go to club.capital. You know, in all of the businesses that you may acquire, hiring, finding, attracting, developing, and retaining A-players is key. And that's why we've partnered with Autopilot Recruiting and Coach P Consulting to be able to first have a team to develop and work with so that you can go deep. Go to coachpconsulting.com so you can work with someone who is actually training, developing their team twice a week. But first, you've got to attract some of those A players, and you need to do it on a regular basis, especially if you're going to go to a second office, a third office, maybe even to a second business or a third business. Uh, talent acquisition becomes incredibly important. I was this just this morning with my program group, and we were talking about this idea of hearts and smarts, and it's really a blend of both. And at the end of the day, developing the skills of entrepreneur acquisition entrepreneurs is important, but then also it really comes down to still going to be the people in the business.

Right?

Are you going to be acquiring some A-players if you acquire the business? If not, you're going to have to possibly replace them. And working with a company like Autopilot Recruiting is going to be able to help you to do that on a very regular basis. Their communication is second to none. They're doing it— you don't even have to think about it until you get an email with a qualified, vetted candidate who's already gone through several steps in the process. You can take it, you and your team, maybe your EA can schedule an interview with you. And you can go on through your recruiting process. Go to autopilotrecruiting.com and coachpconsulting.com. All right, everyone, till next episode, lead well.

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable?

That is the question in this podcast. We'll give you the answers.

I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation? Check them out at club.capital.