Ep 168: How to Buy Small Businesses with ZERO Down with Jonathan Jay

The business that you're looking at to buy would be too small by itself, but as part of the group, it works. So you don't need the owner anymore. You might not need all the staff anymore because you've already got an infrastructure. So you're effectively buying the contracts.

Welcome to the Next Level Income show, where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, next levelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On today's show, we have Jonathan J. Jonathan has been an entrepreneur since dropping out of university at age 19. Now 52 years old, he has built businesses in publishing, digital marketing, adult education and coaching, and preschool education and sold each of them during the pandemic. He made 48 business acquisitions to create the fourth largest group in his sector in under three years. One notable deal is buying a $5 million annual revenue digital marketing company from its private equity owner for just a dollar and sold it for $1.3 million just 11 months later. He's an advocate of a healthy work life, balance suffering mental and physical burnout, and believes you can achieve success without business taking over your life. He now helps other people buy businesses and helps them avoid the expensive mistakes, and he says he has made them all. We're going to talk about those and more today with Jonathan Jay. Jonathan, welcome to the show.

Thank you for having me, Chris.

Absolutely. I love technology. You know, here we are, we get to have. Have a nice conversation. You're all the way on the other side of the Atlantic Ocean in London. I used to do this podcast in person, and that's one of the cool things about the pandemic is that it opened up, you know, this world where, you know, this is now, this is now the new normal. You know, unfortunately, the, the new normal with certain things like interest rates, where inflation has been over the past year or so, and what we've seen coming out of the pandemic has really changed a lot of things. And I'm excited to talk to you, Jonathan, with your expertise in small businesses and really dive into what potential business owners, what investors can look for with that space. But before we do, I'd love for you to share a little bit about your background with the audience.

Yeah, sure. So my specialty is buying businesses Especially small businesses. And I first fell into mergers and acquisitions 24 years ago in 1999 when I sold a publishing business owned and I never intended to sell it. I didn't even know how to sell a business, didn't know anything about it. But someone came along, offered me money for the business. So I did the deal and I made more money the day I sold it than I had in the previous two and a half years of owning it and turning up to the office six days a week. So my eyes were open to a different way of being in business. And then over those last 24 years, I bought and sold. I've, I've sold businesses to private equity. I've. Businesses from private equity. I've turned around struggling businesses. I've done very aggressive buy and builds. 53 acquisitions in one particular sector. 48 of those deals were during the pandemic. That was a very interesting time to, to, to buy a business. I bought businesses and flipped them. So I bought them for Nothing effectively for $1 and then 11 months later sold them for one and a half million dollars. So I, I've, these are all the highlights. But I've also screwed up deals. I, businesses.

We wouldn't, we wouldn't have you on the podcast if you didn't have any, any lessons.

I like to give a balanced view of. Yeah, it's not all rainbows and, and, and unicorns. Yeah, the, the. Buying a, buying a business has a lot to commend it because you can get growth and expansion that you never had otherwise. You can buy a cash flowing asset that might have taken you years as a startup to, to, to build, but there's a lot that can go wrong. So you've got to know what you're doing, know how to do it properly.

Yeah. And I think you, you bring up a really good point. I work with a venture capital group here and you know, the, the types of individuals that start businesses, you know, as they grow those businesses, they're not always the best suited to actually run those businesses. So you know, I think it's, it's important, you know, you, you may be good at starting businesses. Some people are like, well if you start a business, why would, why would you ever sell it? We get the same question on the real estate side, like why is this person selling this real estate? Well, maybe they focus on building and we focus on operating, you know, and there's, there's different, just like there's different types of real estate specialists, there's different types of business leaders and business Specialists as well.

Yeah. I mean, the number one reason for people selling a business is retirement. And there are more people retiring out of business now than they ever have been. So this is very much a buyer's market for business. Everyone thinks because they've been watching Shark Tank and Dragon's Den, that is all about the money. But if you've got someone who's owned a business for 20 years and they've made good money and they've paid off the mortgage and they've made sure their family are looked after, now it's all about getting rid of the stress, enjoying their older years, traveling and doing things like that is not about having a big, big payday. Because as we get older, actually we don't need as much money as when we're young.

Yeah. And the last statistic I heard, 10,000 people are retiring a day in the United States and 10% of those people own small businesses. That's a thousand small businesses basically potentially coming onto the market every day. It's really incredible. But I want to go back to. You said the reason most people sell a business, Jonathan, is that they retire. Walk us through why you sold your business.

Well, the, the first one, first publishing, certainly wasn't retired. I was 27.

Yeah.

I was like, yeah, it was because it was a business that didn't really make much money. It was a lot of work, but didn't make much money. Yeah, I had, there was a slight overlap with another business that I'd started and that one had the real potential. So it was a case of clearing the decks and basically just, just getting it out of my life and then focusing on the, the next business, which actually was a, a massive growth business. And that was one that I sold to, to a private equity firm in London seven years after starting it. And the, the way I did that deal, I never really talked about at the time, but I talk about it a lot now. I, I managed to get the scale to do that deal by buying my main competitor. We were number one in the marketplace and our competitor was number two in the marketplace. So by buying them, we created a massive gap between us. And number three, we created a huge amount of scale. We got all of our competition online. So this was when everyone did Google AdWords for their marketing and we were competing and spending more and more money trying to get AdWords for every keyword. But by removing our competitor, our marketing spend went down and our profitability went up. But it created a big enough business for me to be able to do the deal, which was A, which was a pretty good sort of retirement sized deal. But again, I was only. How old was I? Was I 36, 37, something like that. So I wasn't going to retire too young. Too young, absolutely. So I took some time out and then went again.

Yeah, no, and you know, that's the thing. We, we actually, we hate the word retirement here at Next level income because we love financial independence and we, you know, we really feel like with, with that people get to follow their passions and do things. And I know, you know, part of your story is, and we were chatting a little bit before the show here today is, you know, kind of getting, getting burned out. I know how you feel. I, I spent 18 years in the medical device space. I was on call for 12 of those years. I was juggling our real estate business as well as the medical device business. And I just hit a point where I was spending too much time away from my family. I was working 16 hours a day. I knew I wasn't going to do it forever, which is why I had kind of the, the escape. Escape plan to pull with the real estate. But what, you know, you've learned a lot of lessons. We're going to talk about things you've learned on the business side. What did you learn on the life side with respect to going through that?

Well, I think, I think a turning point for me was helping my 7 year old daughter, although she would have been 6 at the time, with her, with her homework and she bought her spellings home from school and we were going through for the first time and one of the spellings was unhappy and she looked at me and she said, that's you.

Oh.

I was stunned. I didn't know what to say. And I, I made nothing of it. The next day I said, Lily, when we were doing the spellings and you said, unhappy. I said, what makes unhappy? And she said, work. And I suddenly realized that I'd gone from what I considered to be a good role model of, you know, business owner, entrepreneurial to actually a really bad role model because I made owning a business look like something that was a negative thing.

Yeah.

So that was, that was interesting. And then, you know, I'm, I'm 50. How old am I? I'm 50. 52. 52 by the time this podcast goes out, in fact. So I'm 52.

Well, happy early birthday.

Thank you. And I really have all considered myself to be able to take any sort of stress. You know, I got very broad shoulders. I consider myself very robust. I don't, I Don't, I don't wilt under pressure. But then I started to notice as I got older, as I crossed that 50, that 50 point, that maybe too much stress starts to be a bad thing. And I was actually more stressed on holiday than I was back at work because I was worried about all the things that I was sitting. And I remember walking around the pool at the hotel with my, my fists clenched, sort of like so tight. And when I got back to the uk, I started having stomach pains. And the stomach pains were so severe that I did what most men never want to do, which is go to the doctor. I went to the doctor and I thought, I've got it. Yeah, this isn't, this isn't good. And you start thinking, you know, worst case scenarios. And the doctor immediately sent the hospital for a colonoscopy. Now, out of all of the medical procedures, that's probably my least favorite medical procedure. Testing experience, shall we say now?

Yeah, that's something, something a lot of people can concur with you on there, John.

Yeah, it's, you know, forget it. And I, they couldn't find anything. I, you know, I really was thinking they're going to find an ulcer. In some ways, I hoped out of anything it could be there was going to be an. And they couldn't find anything, which meant that all of this physical pain that I was feeling was actually generated from the stress in my mind. Putting that experience together with my daughter seeing me as an unhappy person, I thought, business isn't worth it. No business is worth, no amount of money is worth, is worth this. So I started to plan an exit from that business. And in fact, it was easier than I thought because I had a business partner who was very happy to, to take over.

Wow. Yeah, that's, that's powerful. I think a lot of people listening can relate, you know, that are, you know, that are by all measures successful. Right. It's like we go through life and I think it's one of the, the challenges we have with, you know, we see people go through midlife crises. You know, you work all these years, you go to college, say, oh, I'm supposed to go to college, get a good job, do this, and then you're successful, you're making money, you have a nice house, you're married, you have kids, and you're still not happy for some reason. And, you know, we struggle to figure that out. And a lot of people don't stop and think about or have the experience that you did to give you that space. My Experience was, was similar. I was, I was managing our medical device business and, you know, continue to grow the, the private equity group. And My son was 10 at the time. We were out in Salt Lake City skiing, and we're coming back. And he looked at me and I was working on my business plan for the next year. It was like the day after New Year's, or maybe it was New Year's Day, and he said, dad had such a good time. And we were talking. He goes, I want to do more of this with you. I thought, wow. And my father died when I was five, Jonathan. So I didn't, I didn't get those experiences at a stepfather, but, you know, it was a little different. And I rewrote my business plan and took me out of it, and I, I essentially transitioned later that week, two days later, that was Sunday, Tuesday, I talked to my, my VP and we, we worked that out and it gave. Gave me a lot of space to kind of re. Engineer and restructure my life, you know, more around my family and do that. And I think this is, you know, going back to the retirement point I made earlier. A lot of people say, I just want to stop doing what I'm doing. And you have a lot of business owners that do that as well. But I think there's a different way to do it. You can transition out of what you're doing as an investor. You can take the business, like you mentioned, and maybe put somebody in, maybe take less money, but have somebody run that business for you and make it more, more passive. Or maybe you can take, you know, the skills that you've developed into a career and do something like buy a business, which is what you now help people do with all your experience. So tell us a little bit more about that. Tell us, you know, how, like, what are the different stages of businesses? And, you know, people may be surprised that you're like, oh, I don't have to start a business. I could buy one. Maybe you can kind of walk us through the different options that individuals have when it comes to businesses.

Yeah, I've actually been running a training today over here.

Oh, there we go.

Well, we'll make sure.

We'll tell the audience how they can, they can get access to that before the end of the show. Yeah, absolutely.

So thank you. So, yes. So the best type of business to buy, certainly as a beginner, is an established, profitable business. So a business making money that will continue making money even when the owner isn't there. So it's. You're not buying A job, you, you really are buying a business that, that operates without a talented individual being at the, at the helm of it. And that's the very best type of business to buy. Now if you're more experienced and you own a business already, then there's the opportunity to buy maybe a competitor who's got themselves into some problems, usually financial problems, and buy a turnaround and you turn around the business and turn it from something that's in trouble to something that's successful. And I think there's a lot of ego codes with the turnaround because you've done something that other people can't, can't do. You've solved someone else's problem. But as a beginner, it's hard work. So you need to be buying a business that's making money already, that has consistently made money for years and will continue to make money when you own it. You are not buying a job where you go and sit in the office every day or have some very specific knowledge about that is you want one that's big enough to have a management team so that you don't have to be there. And that's typically $1 million plus business now.

Million plus.

The million dollar plus business is easier to buy and easier to finance than the $200,000 a year business.

Interesting. Yeah. Yeah. So the sweet spot. So a million plus, like a million to, you know, where do you hit the point where you have larger buyers that are targeting. So what's kind of the upper end of that sweet spot in your opinion?

Yeah, it's usually then based upon profitability. So if a business is making $2 million bit Dar, it starts to be of interest to the smaller private equity funds.

Okay.

Those type of types of investors. Yeah. And you've got yourself into a little bit of a, a difficult position negotiating wise because the private equity people will always have more money than you have.

Yeah.

By the way, the key to all the deals that I help people do is they don't put their own cash into the deal. That's, that's a really important point. So none, none of their own cash. Not even really.

So yeah, it was a John Allen, one of the, one of the books I read 20 years ago. Nothing down. It was Jonathan. John Allen.

Oh, Robert. Robert.

Robert Allen. Thank you. Yeah, I'm sorry. John Allen's one of our, one of our operating partners on the self storage side. So he'll get a chuckle out of that when he hears this. But yeah, Robert Allen. Yeah. Nothing down, Nothing down for the 90s. He had all these different, that was.

All the real estate.

It. Yeah, all the real estate side. So. But you can do that with businesses as well.

I mean, I must admit I don't really understand how it works with real estate, but I understand how it works, I understand how it works with businesses. Yeah, we can, we can put together a finance package that doesn't involve our own cash. Yeah, yeah. If you think about it, if, if, you know, if, if, if it was a larger deal and let's say it was a 10, $10 million acquisition, that was the price that we're paying, you know, you wouldn't expect to sort of to put in 50,000 of your own money. Well, maybe you would, maybe you wouldn't. I don't, but I don't think you should. But if it's a smaller deal, $1 million, you're paying $1 million for the business, yet there shouldn't be any of your own money in that deal at all. It should be completely financed. And we can, we can several different types of finance and piece it together like a jigsaw. And when we've got all the pieces fitting together, then we can see the picture on the front. And the picture on the front is your new brand new business. So we can use asset finance and we can use different types of cash flow finance. We can finance the accounts receivables and we can, we can use the cash in the business. We can use some seller finance in there. I think every deal should have an element of seller finance. It, de risk it. We can link what we pay for the business to the performance of the business. So, and this is what I'm recommending everyone does right now because yeah, we are in a bit of a economic situation.

Yeah.

Worldwide. So you don't want to buy a business and then a month later it, it nosedives. You don't want that. You know, you can't always protect against that. But what you can protect against is paying for a business at top dollar when it's nose dived.

Yeah.

So linking the performance of the business to what we pay for the business is not something that sellers particularly want to do. But it is a buyer's market right now. And I would say if they've got confidence in the business, why wouldn't they do it?

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Yeah, I mean, quite often there isn't any interest on seller financing. We, we don't pay any interest at all. So, you know, it's the, it's the, this money you're ever going to get. And just to put it into context for people listening on. Sure. What that, that terminology means, seller financing is where we pay for the business over time, out of the cash flow of the business. So in effect, depending on which way you look at it, but in effect, the seller is lending us the money to buy the business, but the business self finances. So the question I always ask people is if the business can self finance, how many businesses could you buy?

Yeah.

And the answer is, well, as many.

As you want to because they're structured properly. Yeah.

You've got ultimate upside.

Yeah, yeah, I love that. So, okay, million plus, you know, you start to hit that sweet spot. You mentioned how you, you know, you look for proper financing. What, what else do you look for? What type of, what type of businesses? You know, what else do you look for when you're buying a business, Jonathan?

Well, if, if you aren't that bothered what type of business to buy, then certainly a business that has fixed assets is definitely an easier business to finance. It gives you another financing option. So real estate can be one of those.

Like a car wash or a car wash. Yeah, absolutely.

It's got equipment, machinery. You can, you can use it as collateral for a loan. It's got real estate. Use that as collateral for a loan. And then we can use the money released by that borrowing in order to pay the owner, but also to pay ourselves. Because I, every deal should have an element of a deal fee built into it. So you actually make money the day you buy the business.

I like that. Yeah, I like that. We should be compensated for your time. And really you're familiar with profit first?

Very much so, yes.

Yeah, yeah. It's like for Those listeners that aren't, I highly encourage you to check it out because it's very similar to what we, what we, what we kind of advocate here at next level income, which is in like pay yourself first to invest. And that's what profit first is. It's essentially pay yourself first out of the business. So you have profit, you have room for growth going forward, but you also have room, you know, you're, you're not only creating a profit for yourself, but you're creating a profit for future growth. Right. And if it's not structured that way, then maybe it's, it's either not structured right or maybe it's not the right deal.

Got two options. You buy a business and take money out or you buy a business and put money in.

Right.

Which would you prefer?

Yeah, yeah, I love that. And I think that's, you know, that's where your methodology is different. And Dan Sullivan does a great job teaching this at Strategic Coach. A lot of small business owners, they're really just self employed. They're not owning a business. They have a job that they're running themselves and they don't, they don't really consider this. Are there businesses that you look at, Jonathan, where you have owner operators and you're able to, to come in or bring one of your students in or partners in and, and basically replace them and ultimately turn it into more of a self running business?

I'll tell you when that works best. Yeah, works best when you already own a similar business and the business that you're looking at to buy would be too small by itself. But as part of the group it works. So you don't need the owner anymore. You might not need all the staff anymore because you've already got an infrastructure. So you're effectively buying the contracts. And I should say I've just come back from a vacation and I, I was reading Profit first and a Strategic Coachbook.

Oh, there we go. Which one was it? Which one?

I know how to have fun.

Yeah. Hey, sounds like my kind of fun.

The strategic coach 1 was 10x is than 2x or words. Words.

Yeah, that's his. Yeah, that's his new one. I haven't read that one yet. That's, that's, that's. I heard good things. Who, who not how was a really good one as well.

Oh, that. I had that with me as well. Oh my God. I'm giving away all my, all my vacation secrets.

There we go. This is. You two can have as much fun as Jonathan and I. If you, if, if you learn, if you learn from what we're doing. So one of, you know, one of my concerns is as we approach kind of the end of, you know, the latest financial credit, real estate cycle here, you know, what, what happens when lending is harder? What happens when, when cash flows go down. Do you have any opinions on what kind of business you think businesses are, you think are going to be the most robust here over say the next, we'll give it a broad range, say five years. Because, you know, I don't, I'm not saying I can predict the future, but certainly there'll be another downturn. You know, what are some robust businesses that, that are appealing out there?

My, sort of, my very simple answer to that. Are the boring businesses, the businesses that just trundle along in the background? We don't even know, we don't think about them very much. You know, the business is exciting and sexy. So definitely, you know, we steer clear of, you know, venture capital. Loves the apps and the technology.

Sure.

That's not really what we want to do. We want to, we want cash flow. So we want a business that, that makes things that everyone needs or it's part of a supply chain or it's got long term contracts or recurring revenue, so it's got membership, subscriptions. And if we structured deals where we're not putting our own money in, if in three years time, whatever that business does is replaced by a competitor or by technology, then you know, we've, we've made our money on the way in, we've made our money during the three years of ownership. So, you know, no business lasts forever. We just move on to the next one. And what I recommend to people is they buy several. So you hedge, you hedge.

Your bets are kind of sequential in terms of your cash flows and exits and those sorts of things.

Yeah, absolutely. You don't put all, I don't know whether you, you use froze, but all your eggs in one basket.

Yeah, absolutely.

Because that's really what most business owners do. They start a business, all their eggs are in one basket for the next 25 years. And they hope that in 25 years time that the business will be enough to fund their retirement. And usually it isn't. So you do not want to be that person. You want to be the person who owns six different businesses, all positively cash flowing. And when one ceases to positively cash flow, we close it, we sell it, we give it away. Doesn't matter, we're not personally attached to it. It's not our baby. We, we didn't give birth to this business. And there are so many businesses out there to buy, we always replace that one with another one.

Interesting, interesting. Okay, so there's a lot of listeners that, you know, their ears have perked up and this isn't the first time we've talked about potentially owning or investing in businesses on the show. But who, like, who do you typically work with? Jonathan, who's your typical client that you work with in your business?

50% of the people help buy businesses, own businesses already and the other 50% are coming out of corporate life. So they want to buy a business rather than a business. And I can tell you a growing trend in the last 12 months has been property investors, real estate investors.

Yeah.

So Real in the UK is going through a really tough time right now. And even though I've got clients all over the world, the majority are in the uk yeah, I'm based in London the way it is. And the real estate market in the UK is really, really tough. The returns aren't there. We are now taxed on our revenue, not on our profit in our real estate business. In residential, right. You're taxed on the revenue rather than the profit. So you could end up paying more tax than you actually make in profit.

Yeah, so, so yeah, that's a bad tax scheme.

Oh, it's terrible. It's terrible. It's only, it's coming in the last four years. So people who've, who are good at buying real estate naturally are good at buying businesses. They just got to learn a slightly shifted skill set.

Yeah, no, and I've, I've always, I talk about this in my book, you know, an apartment building, you buy a 200 unit apartment building that's just a business with 200 like you, like you said, recurring monthly paying clients that are paying you. And you know, one of the great things about real estate is you get a lot of tax benefits here in the United States. It sounds like some of those tax benefits aren't, aren't still there in the uk. But the cool thing is you could have, and this is what I'm a big fan of right now, or I call them operating like pieces of operating real estate, which is a car wash with a business and real estate. Absolutely. You could have a short term rental which you're, you're, you have a hospitality business essentially with real estate and you can blend those two together and like you said, which I think is really good, you have two lendable sources of revenue which is both the real estate is collateral as well as the Business revenues. Yeah, as well. Okay, so um, walk us through. I got your, I got your website pulled up here. Dealmakers.co.uk which we'll have in the show notes as well. But how do you, how do people learn how to work with you? Obviously you, I love what you do because you, you have done this. You're not, you're not just the teacher, you've, you've gone out there, you've done it in multiple different facets. So if somebody's interested in learning how to buy a business, how do they work with you? What, what options do you have? Jonathan?

Yeah, sure. So I've got a free course. And the, the free course, you can find that on the, on the website. The free course is the introduction. You don't expect all the secrets in the free course, but I give, I give you enough for you to decide whether it's something that's of interest to you and if it's something that's of interest to you. I do a zoom course that's worldwide. I have a 12 month development program for the people who are really serious about it. There's only a small fraction of people do that, but they're the people who, who really want to buy businesses properly, do it, properly do it for a living. And my YouTube channel, look up Jonathan J on YouTube.

Oh, terrific.

Yeah, there's about 200 videos with some real behind the scenes videos of businesses that my answer bought and I've bought interviews with my clients, how they did their deals and I, I found that the YouTube channel is a great source of education for people. And it's all free, of course.

Yeah, no, I love that. And I'm gonna have my, my younger son especially, he's, he's always interested in learning how to make money. Wants to know how much everything costs, how much do we make? How much are you work, dad? You know, what does that house cost? How much does it take to buy this car? All these things. I'm gonna have him check this out because, you know, this, this is the great thing I think, you know, we, we love to teach people about financial education, you know, the language of finance. But my true belief is that entrepreneurs are going to save the world. You know, all these problems that we're facing, you know, whether it's climate change or the problems that we're facing with, you know, health care and those costs, whatever it may be, I'm optimistic that an entrepreneur is going to pop up and help solve this problem. So I think, you know, the more we can do to help cultivate new entrepreneurs in that entrepreneurial spirit. It resolve for the better. So Jonathan, this has been a great conversation. I look forward to checking out more what you have. Also, like I said, sharing it with my boys. I already mentioned some of the links here, but if somebody's listening, what is the best way to find out more about you? If you don't mind reiterating that.

Yeah, sure. So, Jonathan J. On YouTube, YouTube channel 200 videos and buying a business or go to dealmakers.com which is co.uk.co.uk is a British, British website.

Yeah. And that's right down here in the show notes. If you're watching on YouTube, if you're listening on on your favorite podcast platform, you can check it out in the show notes as well. Jonathan, it's been a pleasure talking to you today. Enjoy your evening over there in London.

Thank you, Chris.

Hey Chris here again. I hope you found this episode valuable. Now I have one more thing to gift you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also please like share and take just 90 seconds to give us a rating on Apple Podcasts.