What I Wish I Knew Before Buying A Business | Don’t Make The Same Mistakes

75. That's the percentage of small businesses that fail. I want to help you avoid all the pain that is the failure of businesses. I learned the hard way. I lost 50,000 in my first deal. I lost 75,000 in another deal. Now I have many businesses making millions of dollars a year. But what changed? I started buying businesses instead of starting businesses. What do you wish you knew before you started investing and doing deals? We're going to try to answer that today. The most important things for all of you. Action line. First thing is you gotta keep your day job. I kept my day job for just about 10 years before I finally left. If this is your first deal, do me a favor. You can invest, do deals, but also keep your salary. Your salary is like a lifeline to oxygen above water until you learn to swim by yourself. Keep it until you're sure you really know what you've gotten yourself into. That is unless you have one of the big three, which I consider cash to cover any downside inside knowledge on the business having done it before. AKA you're an accountant. You buy an accounting firm or three investors that cya. This one's so important. Partners, you gotta proceed with caution. Imagine every partner you have is gonna leave you. Data says about 70% of our partnerships fail. Our generation stays at a business or a job for three years on average. So that new co founder that you have, it's likely they won't be the person that you grow old with. I didn't have a lot of rules for partners when I started. Now I do. No. Partners get equity upfront without cash in the game. Never give away equity without a vesting schedule. They need to do the deal with you, put a in the same amount of cash as you and they need to still vest so they can't walk away leaving you stuck with the bag. Second is no 5050 partner. Someone needs to be in control and it's probably you or whoever has the most skin in the game. You also need to make sure you have a partnership agreement. Something like this with clear deliverables on both sides and a pre exit provision if it doesn't work out. Think of it like writing a prenup before you get married. Let me tell you a little story. I did a deal. I didn't vet the partner very well. I got all excited and I wanted to start straight away. But I didn't think about the fact that the best predictor for future behavior is past behavior. And this particular dud had a behavior of being like super mediocre, not trying Very hard getting fired from companies, it being other people's fault. Reaching middle age, not having much to show. Victim to every circumstance. The way that things start is the best they'll ever be. They will likely never get better than that. First date. If it doesn't happen up front, will only get more painful on the back end. So you can either have an awful conversation early or you can have an unbelievably uncomfortable conversation later on. What ended up happening to me, I ended up writing a big check to get this guy out of the company, to get the negative energy away and to focus on being victors, not victims. I could have saved myself a lot of zeros from paying attention to this point right here. I got to go grab something. I'm going to exit the car. But you guys need to have an exit plan in your business. What does that mean? What if you get tired of this thing? Can you sell it? How long is it going to take? Who are you going to sell it to? If you start with the outcome you want, it's much easier to get there with your gps. I kind of think about it like a game of Candyland. You guys remember that game? You figure out on the roadmap, the entire point of the journey is get to the end of the map. This is your game with buying a business. At some point, the business that you do today probably won't be the one you want to do in 10 years. So figure out how to get out of it ahead of time. You don't want to buy a job that you hate. This type of business, a lot of work. You can see them in there working all day. It's specialty. You need skilled labor now. A business like a dry cleaners, although I don't love them. Less work. You could hire lower skilled labor to do the work next to you. But don't you see the alterations handling behind me also more skilled labor. You want to make sure that the business you buy is not just you trading one job you don't like to work for. For a business that you can't escape from, that is still a job. This is the number one thing I see people do wrong separate is you can start with a business like this that you don't have to be the operator of something like a postal shop. You could actually have somebody else run for you. But don't buy a job you hate. Cause it turns out you can't leave a business. Like you can leave a job, but this one I'm going to see if they might be interested in selling Hi, do you have an Instagram? Give you guys a little love. Hey, I know I said shh, don't tell, but actually you shouldn't keep your deals a secret. You want the deals to get beat up. That way you know if they're actually good or not. Also, this place is cool. Gwynne's owned it for 25 years. How awesome is that? Maybe you should come check out Point Loma if you need to do some shipping. How long do deals take to do? There's something called the 3612 framework. Basically, you need at least three months to learn about deal making, how to do a deal. Then you need six months to actually close the deal. Then you need 12 months after you've bought the business to integrate the business. That means make sure you actually know how to run the thing. Most people get into trouble because they try to expedite any of one of those three steps. And when you do that, you end up up all the work you've done previously. So get really tight on realizing that good things take time. The people that try to rush are often the people who caught up in get rich quick schemes. And the only things that those things help with is helping you lose money fast. Franchise. Let's check out the competition. I don't like to own these things. I like to know what they're up to. Love them, hate them, really depends. This one's interesting. It's in a tiny little box, but you can see the build out costs. It's fancy. You got to get all of their particulars. So I'm really careful about making sure that the franchises that people use and buy have expenses that make sense. Otherwise you're shelling out money left and right before you even make a dollar. That's why I typically like to buy, not build. So be careful and choose your franchise wisely. If you're going to buy a business, you need niche expertise, sector specific experts that understand your business. My friend Zach bought a gym, a CrossFit gym to be precise. And the reason he got comfortable buying it is because he paired up with one of the trainers that knew the ins and outs of the business who had also managed the joint. So don't just buy a business all by yourself with no expertise. Make sure you find yourself a little who, not always how. Let me tell you why you want to have a who, not always, just a how. Because the next rule is we don't buy turnarounds. You're not a pro, so we don't do pro level things. Yet in business buying, I Think about it like, nice house on a nice block. We just let the asset appreciate we don't buy the shitty house that we have to completely redo on the block and try to become an expert in fixing the kitchen right away. Derelict businesses or turnarounds are hard. They're super hard. And you are just easing your little tootsies into this game of business buying. So make sure it's profitable when you buy it. I've got some more lessons I actually thought we'd talk about when it comes to what I wish I knew when I was buying my first business and what not to do. No deals that you could lose more than 20% of your net worth on. That's my number. These days those numbers are maybe more like 5%. I might be able to lose 100,000 or a million bucks and be okay. Not like bragging, just to say the truth, but in the beginning, I wouldn't have been fine losing 1,000, 10,000, 50,000. So know what your 10 to 20% number is? And that's going to tell you, should I do this deal or not? Be really careful with SBA loans. This is some 202 Warren Buffett level shit. But remember these words. It's controversial. I would never want to do a personally guaranteed loan on my first deals. Personal guarantee means if you get a loan from somebody else, like the sba, the Small Business Administration, you get some sort of cash from them, but they get access to your assets. So break this down. I owe you. Hi, bank. Please give me $10,000. Great. I will give you $10,000. You now need to pay me back that $10,000. But your business is failing, so you can't. No money for you. So what happens? The bank says, ah, you have a nice house that's worth more than $10,000. I'm going to take your house, pay back that $10,000. You. You don't have a house. Oh, I'll take your car. This is. This is a car. If you don't have a car, they will come after anything that you own, and this will be you sad at the end. This is the weight of loans and debt done poorly. So make sure that you understand if you actually want to take that risk. This one is so good. It's called downside scenario planning. What if the worst thing happens to your business this year? Are you still profitable? If not, we pack. Look at this spreadsheet right here. This is so good. And you should use it for every single one of your deals. Actually, if you click the link below we'll give you this spreadsheet for free. 99. Basically what this does is you're looking at a model that says, if we make $100,000 this year right now, and we lose 75, 50%, 20% of our total revenue or profit, what happens? How much Runway do we have left in the business? How much money do we still make? Can I still cover the debt that I use to buy the business? This downside calculator has saved me many times from getting into a business and realizing, oh my God, I'm one lost sale away from bankrupt. No one out mitigate go to zero risk. Which basically means you ask yourself the question, could this business go to zero? And then you create a plan for what to do if that happens. So let's say you buy a property management company with 30 clients and 20 of them are owned by one group. So you could lose 20 clients overnight. What could you do to still buy the business? Decrease the price of the business by those total customers for two years and hold that in escrow somewhere, meaning the bank holds it until the deal goes through and you've kept those clients for that period of time and recouped your cost. There's tons of ways to mess with businesses, but basically you want to ask yourself, how could this business go to zero and how could I protect myself from it? Don't fall in love with any businesses or any deals. My dad always said, never fall in love with something that can't love you back. Really important that you remember that. There's so many deals that you could swim in them. It's the kiss of death that you get too far down the road with a deal and you have sunk. Cost fallacy, which means because you spent a bunch of time and cash on it, you think that you still need to do this deal. You fall in love with the deal. Let me show you what this looks like. You're about to close. The seller knows that. So right before you go to close, he says, I need a little bit more cash or I can't give you enough financing. These tiny paper cuts, they bleed you out. So hold the line. Too many deals to fall in love with one. This is super technical, but in every deal you do, you need to find the one thing that could kill you. One of the biggest deals I've seen go sideways was largely because of one thing. That was the assets that they had, the expensive stuff that started to fail or break. In this instance, it was trucks. So it's really normal pre sale for people to band aid equipment. That means that the repairs don't come out of their P and L before they sell or their show on their balance sheet. It looks to you like they've got a fleet of great trucks used, but behind the scenes there are a bunch of lemons. You need to get a third party to value their assets. It's really easy. You can Google search third party valuation experts, but make sure you do it. Let's say you're like me and you don't want to take all that risk on. You want to diversify your risk. You want to like spread it out across a bunch of people. There's a lot of ways that you can do that. You can get seller financing, you can raise from investors, you can use multiple loans and you can actually learn how to do this here for free. You can use the small business calculator. You can do deals that help other people grow just by you sourcing the deals to them. Typically for me, I want 12 months of emergency fund cash to make sure if anything goes sideways, I'm a. Okay. Speaking of seller financing, I like it. What does it mean? Let's explain it in one single sheet of paper because that's all I have left. Owner of a small business has money in the form of profits they make each year. They want to sell the business. You don't have money. You need money to buy this business. In order for you to buy this business, the owner gives you money. Then as you make money over the course of each year, you pay out the owner from the profits. It's a little triangle like this business owner gives the cash from its business to you for you to purchase the small business. And as the small business profits more, you give it back to the owner. The benefit of this is that you don't always have to have a personal guarantee, which is good. I don't know if you guys are ready for that like next level thing, but revenue and profit share deals are are those. We should probably do a whole video on this. It's basically where you learn how to buy a business with your sweat or expertise. I'm not going to break the whole thing down. Drop it in the comments if you want me to break down a sweat equity or a rev or profit share deal. Because I got you fam. Okay, the thing is, small business owners lie to you all the time. So one having an accurate way to review the financials of a business, super important. You can use a tax accountant to do that. And also once you become the owner of the business, you can lie to yourself too. So I use things like this to track my business every single week and see where it's going. This is called a financial scorecard. It's fancy. It sounds kind of boring. Maybe people would go rather watch Netflix and understand this. But if you understand things like scorecards, that's how money gets accumulated. Because money is like a mistress. If you don't pay attention to her, somebody else will. Remember, entrepreneurship is hard. You'll lose money and time and sleep, get stolen from and sued. But working a 9 to 5 is hard. You'll be underpaid, not promoted, under challenged. Hate bosses, all of it is hard. So you get to choose your heart.