How to Actually Buy a Business (and Avoid the Passive Income Trap)

Wanna know the fastest way to lose $1 million? It's believing the passive income lie that's all over social media right now. They want you to believe that you can buy a laundromat, hire a manager, and retire to the beach while the cash rolls in. But after acquiring 4 businesses in 5 years, including one spectacular million-dollar failure, I'm here to tell you what really happens when you try to buy your way to passive income. In this video, you'll learn the 3 critical criteria for any business acquisition, why most passive business investments are actually wealth destroyers, the one question you must ask before buying any business and the framework I've developed after losing 7 figures and making a whole lot more so you don't have to learn the hard way. This framework comes straight from my Unbreakable Wealth Mastermind, where founders and high performers learn to build wealth on their own terms. If you wanna go deeper on frameworks like this and join a community of intentional wealth builders, click the link below to learn more. I'm Mike Brown, and by the end of this video, you'll know exactly how to evaluate business opportunities without falling for the passive income trap. Let's dive in.

We are continuing in our building wealth focused unit. We did our planning phase. Now, we're moving into last week. Talked about risk-adjusted returns. And this is really kind of a continuation on that. And I'm going to talk about a fad that is very prevalent in the world right now. My friend and previous Unbreakable Wealth alumni Walker Deibel He's kind of the OG in this space. He wrote a book, I think in 2017 called Buy Then Build, basically explaining like why acquiring a business is a better idea than starting one. And it is an excellent book. I highly recommend people check it out, but the book is very nuanced. He goes into a lot of detail about acquiring businesses and because it's such a sexy idea, right? I'm going to buy a laundromat. I'm going to hire an operator. It's called Buy Then Build, Lindsay, and then live off the cash flow.

Like this is the ultimate selling the dream.

All right.

It sounds too good to be true.

And we're going to explore today whether that is actually true or not.

I recently wrote an email newsletter called No Such Thing as a Free Lunch.

That's a great primer on— like we do a case study on acquiring a laundromat and like what the real brass tacks expenses are. But I will say that as always, this is a nuanced discussion. Something Walker says in the book is that acquiring businesses is one of the greatest wealth creation opportunities of our lifetime.

It is true. There are 75 million baby boomers retiring in the next decade, and 50% of small businesses are owned by baby boomers. And their kids don't want to take them over because their kids want to be YouTube stars, and nobody wants to go do the work in these small businesses. So, there is a massive opportunity.

There's a massive wealth transfer happening over the next 10 years. Okay, so first and foremost, I want to say that like acquisition is one of the greatest wealth-generating opportunities, but it is nuanced, it is difficult, it is not easy, and it is not as easy as buying a laundromat, hiring an operator, and then riding off into the sunset and living in Hawaii while the laundromat pays your bills.

Okay, And I'm going to walk you guys through a framework to decide how and when you should acquire a business, what you should be looking for.

I'm going to give you a mantra that will help you make better decisions. I have acquired 4 businesses in the last 5 years, and some worked out swimmingly, some were spectacular failures. I'm going to show you guys where both of those came from. What I hope is that you walk away from this call rather than scared, actually inspired, because I would submit that almost everyone on this call has an opportunity where an acquisition could completely change the trajectory of their business, and I'm gonna share what that looks like, but there are so many more ways to fail than there are ways to succeed in this thing. You have to have a very narrow focus, so I'm gonna give you this framework to show you how you can find that focus.

So, this model is called the Acquisition Triangle.

So, the first leg of the triangle, they're all equally important, but this one I would say is the base or the foundation of the triangle, which is expertise. Do I have expertise and specific domain knowledge of the business I am looking to acquire? And this is the primary factor Think about when you started your business, how long it took you to get to a place where you felt like you had a handle on all areas of the business, right?

I would argue anywhere from 12 months at the low end to 5 years on the high end, right?

So you really understand all areas of the business.

What most of us do, and this is what I did, we might have expertise in one specific area of the business and think that makes it a good idea to acquire this business is not enough.

You need to actually have expertise in the domain in all areas of the business. And this is where people get in so much trouble because even if you buy a perfectly operating healthy business, it's gonna take you 18 months to wrap your arms around that business's operations.

Even if it's exactly like your current business, okay? It just takes a long time to get your teeth into processes.

Going out like this Instagram reel and saying, I bought a laundromat and a nail salon and a SaaS company.

And a drilling company.

There is zero way that all of those businesses like fall into this just hire an operator and let it run mentality. Like, you guys, everyone on this call knows it, but I'm going to repeat it just in case.

Like, I'm all for positive mindset, but you guys, business is hard, period.

And new businesses are really fucking hard, okay? So If you do not have expertise in the specific domain of the business that you are purchasing, run. Don't walk, run away, don't even consider it.

Number 2 is the business must be accretive. What that means is it adds dollars to my bottom line from day 1, okay? This is what I—

again, we're going to go through the specific examples. This is what I got wrong in buying a turnaround, okay?

Never ever buy a turnaround unless you are a turnaround expert.

And even then are really freaking hard, okay. So, if you're going out to acquire a business, it needs to be accretive to your bottom line day 1, and then finally, the third leg is it needs to be an accelerant. An accelerant means 1 1 is greater than 2, okay. Either you need to have a dramatic growth plan in place to buy that business and return on your investment, or it needs to fit into your existing business in a way that it makes both businesses grow beyond what they would have without each other. So, 1 1 is greater than 2. You can ask 3 questions. Why this? Why me? And why now? And all 3 of these have to have answers and you can think about it. You can frame these questions from expertise, accre— and accelerant via the triangle.

So, when I think about why this? Like, why is—

am I acquiring this business?

And this move toward unqui—

acquiring unsexy businesses. Like Cody Sanchez's main street deal, go acquire a parking lot or a laundromat.

I would argue that most small businesses have a natural growth ceiling in place.

So, let's think about a laundromat for example, okay. If you go out and acquire a laundromat, let's say you acquire it for $250,000.

There are things you can do to grow the bottom line of the laundromat.

Like you can buy more efficient machines, you can put in soap dispensing vending machines, like they— and people there are ways to grow this, but at some point, a laundromat is limited to the number of machines that you can fit in the retail space. You can't triple revenue in a laundromat because you have natural constraints, and a lot of boring businesses are like this. Parking lots, storage units, you can increase the bottom line, but there is a finite ceiling.

One thing I learned, I would never acquire a business that has a natural growth ceiling because your expected return is tapped out before you even acquire, before you even sign the LOI.

You you are tapping out your potential return. When we think about growing wealth, what I always want to consider is where is my asymmetric return? Asymmetric returns mean that the upside increases at a multiple greater than the possible downside. Stock option, a call option is a great example of a potential asymmetric return. If I buy a call option for a dollar, that dollar can turn into $30 if the stock goes in the proper direction. If the stock goes in the wrong direction, all I lose is my principal, all I lose is my dollar. That is an example of an asymmetric return. I want to think about when it comes to wealth creation, where are my asymmetric returns? Your primary business is generally the best place available for you to generate asymmetric returns. Ideally, they are risk-adjusted asymmetric returns as well. But looking at a business, it needs to be able to grow exponentially beyond what you pay for it for this to really make sense. Otherwise, it is a bad use of capital and time allocation if it's growth constrained.

Number 2 is why me?

And why me falls in this expertise bucket. Why am I looking to acquire this business? Why would I acquire a laundromat? I am an expert in coaching, I'm an expert in oil and gas, I am not an expert in laundromat operations.

So again, even if this thing is humming, it's going to take me a year to wrap my mind around how to actually run this business profitably. And then this third one is one of my favorites. It's the most nuanced.

Why now? Because just because something looks like an opportunity does not mean it is the right time to make an acquisition.

So when you're thinking of why now, you need to be thinking about greater market principles, meaning is this industry in a growth or declining phase?

Is this specific business growing or is it declining?

And If I acquire it now, will it help my current business? This is akin to people who have a baby to fix their marriage, right? A lot of times if someone's primary business is not working, they're like, oh, maybe we can just grow through acquisition and we'll go bolt this other business on.

You have doubled and compounded your problems.

Your business needs to be dialed and stable and ready to scale.

And you need to be essentially bored in your business if you were thinking about acquiring a competitor. Has a question when it makes sense. So we'll talk about the examples.

Is that the same criteria for starting a business?

It is.

Like when I see that, it's almost like the dollar amount of the acquisition doesn't even—

because this is my same criteria that I use to start a business.

Yeah, that makes sense.

And it's the easiest mantra to remember, but it will weed out 99% of bad ideas.

And you guys, again, I am talking to a group of peers.

All of you guys know this, but Ideas are a dime a dozen. Ideas are not valuable. Execution is valuable, right?

And so many of us have ideas and the why this might make sense all day long.

Let me tell you my favorite idea of a company I'm never going to start.

I hate—

and Steve will appreciate this, he's heard me on the soapbox—

like, it is so hard for entrepreneurs to get mortgages. I hate the process of getting a mortgage. I don't make regular income. Nobody wants to give me a loan.

They'd much rather give a dentist who makes $150 grand alone than an entrepreneur who makes 7 figures in income in random ass ways, right?

I've always wanted—

I thought it'd be a great idea.

What if we started a mortgage company specifically for entrepreneurs, raise a fund, do private loans, do 70% loan-to-value, and then if the applicant defaults and we have to go repossess their house, great, we just made 30%.

Like, I can't start that business.

I have no business starting that business. I don't understand the mortgage industry. I could start it and then I could hire Steve as my operator. But guess what happens when you hire an operator, you guys?

And this is from directly from that laundromat article, There's No Such Thing as a Free Lunch.

If you don't remember anything else from this conversation, remember this: the person who does the work makes the money until you reach a certain scale. So yes, I believe in buy back your time.

Like at a certain place, there is a way to replace yourself completely in a business and have that business make money.

It is not a small business. I would argue that is almost impossible until you start to hit $10 million in revenue to completely replace yourself with a competent operator who can run your business on your behalf with minimal input for you, basically like this guy was talking about. There is no nail salon in the history of the world that runs on autopilot with an operator that's kicking off 5 figures in cash flow.

I just don't believe it.

So let me— I'm going to walk you through the 2 best and worst business acquisitions I've made in the last few years. The worst one, you guys are familiar with this.

This is my brute force ecommerce acquisition, okay? When I look at my triangle now, by the way, that I learned from my expertise in acquiring this business, none of these conditions were true.

It was distressed, so I needed to clean up the balance sheet, wipe out the debt, and then make the company profitable for me to start receiving any ROI, okay? So, number 1, it's not accretive to my bottom line, that's a problem. Number 2, it was outside my expertise, and this is where I was tricking myself. I am married to a digital marketer who runs paid media for e-commerce companies. So I thought I am an expert at e-commerce because I have a secret weapon. I have an agency that is dedicated to growing e-commerce brands.

Guess what, you guys?

There is way more to e-commerce than paid media. There is supply chain management, there is shipping, there are all kinds of things that I was not an expert in, and we crushed the paid media portion and we got our asses kicked when it came to managing warehouse employees and contracting with vendors and ordering supplies and like all of the stuff that I had never done before. I think I could have been successful in that business if it was completely stable and was absolutely humming.

Like in 18 months is when I finally started to feel like I had a handle on e-commerce. If it had been stable, I might have had the runway to figure it out before I burned it all to the ground. The fact that it was losing money when I acquired it meant I needed to get it profitable yesterday, and I didn't even understand the levers that I needed to be pulling in order to get it profitable.

And then finally, it was not an accelerant because that business was dying. Its revenues were $8 million in 2020. They were $4 million in 2021, or they're projected to be $4 million in 2021.

I caught a falling knife.

COVID had a huge fitness boom. Their revenues exploded, and then guess what?

Nobody bought fitness stuff in 2021, and I thought I would go acquire this business because it was distressed and it was a good deal.

When I look at why this, why me, why now, let's just say this was actually a good business deal as opposed to a distressed company. Why me? Like, I did not have the domain expertise to operate an e-commerce business. I can say that now unequivocally.

My 2021 self was very confident in my business.

I coached lots of businesses.

I thought I knew enough to run this business. I now realize if I had just like really been clear about what my expertise was, there's no way I would have acquired this business.

When you look at this criteria, this triangle, does going in with partners change the me? So is it if a partner, say you don't have the expertise, but a partner brings the expertise, is it the sum of the parts of the partnership that you look at the criteria? Or is it if you yourself don't have those 3 things, even with partners, because at the end of the day, those partners might not exist. How do you consider the partner?

Great question. Look, I think partnerships are the worst ships, first of all.

I've run many— my first business, I had a 50-50 partner.

My first acquisition, we acquired a competing mineral company that also had two partners that were 50-50 partners, and we smashed them together in essentially just a merger, just a full-on stock swap.

We were doing about the same revenue.

We were competing against each other day in, day out. So our idea was like, hey, we're competing over the same stuff. We're raising prices on each other. If we just smash this thing together, we can take economies of scale. We can really make this thing happen. The problem was, is that 1 1 did not equal 2, or was not greater than 2. 1 1 equaled 2 in this case.

Let's say we're both doing $1 million in revenue. Now we're doing $2 million, but we have more partners to feed, right? So now all of a sudden we all need the same amount of money to live.

There was nothing that made our business go faster other than we stopped competing against the same deals. What did happen is that we started being suspicious of who was bringing in more, right? We never really integrated the businesses. We operated like two separate business units under the same umbrella, and then the infighting started.

So back to your question, can you partner with expertise?

There is no way for one business owner to know everything, to be a true expert, everything in the business. But I would say that any partner needs the ability to be able to at least competently hire for that role and hold that role accountable. Another one of my friends started a company with a mad scientist, like a hard— it was a hardware company with this mad scientist guy. And so he was going to do all the businessy stuff while the mad scientist guy was going to run the tech and had no idea what was going on the technical side of the business. And it was ultimately a failure because he did not have enough domain expertise to keep the technical partner in check. So, all of that is a long-winded way to say that, look, man, you're advanced, like you personally are— you've bought and sold companies, you're doing this all the time. I would keep as narrow a view as you possibly can of expertise until you're like, wow, this is so limiting that we can't acquire anything else. But I would be really careful about expanding your definition of expertise to include partners unless you at least have enough domain knowledge. If they left, are we sunk or can I hire this role and competently manage? Is that fair enough?

Back to Brute Force and why it was such a bad acquisition, right?

It was not accretive, it had no opportunity to be an accelerant, and I did not have the expertise to run that business.

And now, and then again, that, that oil and gas business, I didn't even mean to bring that up, but yes, we had expertise and yes, it was accretive, but there was no accelerant factor.

Doubling the partners and doubling the revenue with no real plan of how to grow it and make 1 1 be greater than 2 meant that we were essentially just spinning our wheels and then we created a bunch of infighting because we had no real plan for like how this was gonna be a rocket ship to make us grow a lot faster. The best acquisition we've ever done is Claire and BPM acquiring Focus Funnels, Taylor Frame, who happens to be on the call, okay?

I'm gonna explain why this was such a good acquisition for us, okay? Number 1, it was— Focus Funnels was a direct competitor. The function of the business was exactly the same as Best Practice Media. Like complete rip-off and duplicate.

Like these are the same exact companies. My wife has been running paid media ads for a decade. Like she's one of the best in the world at this and there was no functions in Focus Funnels that she didn't understand at a very expert level.

The day we acquired the company, February 1st, we started getting paid by their clients on February 2nd.

So, immediately adds to the bottom line in a profitable way, and then from an accelerant perspective, this was the real beauty here.

Companies were similar in size, we smashed them together, and then grew another 150% beyond that last year because it freed up Taylor.

Now he could just be a sales weapon, didn't have to worry about running the business so much, and Claire could stop doing sales and she could focus on being a CEO, right? And then we had some other growth plans bolting on experts like our very own Seth Conger to help us build systems to make this business scale. So absolute success story, okay?

The way we did it in Taylor's case is we structured it so that it was an immediate equity—

so equity in lieu of cash, right? So now he had equity in the bigger company. And it was based on retained earnings. So there's very little downside for us if Taylor comes and loses all his clients. He doesn't have any equity, right? If all the clients stay, he has X amount of equity, and, and then as the business grows, he gets more equity. So all of our incentives are aligned. We didn't have to come with cash out of pocket. Most acquisitions require capital up front, which means that you're applying leverage, and leverage is both the greatest accelerator for wealth, but is also the greatest destroyer of wealth.

Brute Force, despite all of its problems, despite—

if I had not purchased it with an SBA loan and had leverage, I actually might have been able to save it. But that compounding on everything else was absolutely untenable. So here's what I want to leave you guys with, and then we'll start fielding some questions. Claire has now acquired 3 agencies, and part of our growth plan in the future is to continue to acquire agencies. But we have a really narrow focus and scope. So Taylor was not the only agency that approached us to acquire them last year. Okay?

We turned down more agencies than we do even without even looking at the deal. If they're not exactly in our lane, then it has to be a—

so we also acquired a PR agency and we said, we're not experts in PR. No, but the way we structured the deal made it essentially a zero-risk deal. For us. So if we could figure it out, then we didn't have to— we weren't on the hook for a bunch of money. So that's where these zero-down acquisitions, I think, make a ton of sense. But I would argue, as I'm looking at all the faces on this call, like, all of you guys have an opportunity to go out and acquire a business and probably have it be accretive to the bottom line. And I really think it is a great growth strategy, but there are so many ways to fuck this up. Doctors acquiring other clinics, like that's, I think it's a great, it's a great strategy. Marketing agencies, obviously going and acquiring competitors like they're, Mike Mathwig teaches insurance agents to do this literally all day long. It is a great strategy for growth, but it's got to be very focused. Now, last thing that I forgot to talk about is kill criteria and due diligence. The other biggest mistake, I don't know how many biggest mistakes I can possibly make in my e-commerce adventure. But from the day that I signed the LOI to the day I closed, the deal got worse and worse and worse. The earnings weren't exactly what they reported.

I uncovered some extra debt and sales were slumping.

From the day I started looking at the business to the day I closed, I only got bad news. Had I had ruthless kill criteria in place along the way, I would have never acquired that business. Let's just say the revenue was $2 million from the day I started and it slipped to $1.8 by the day I closed. Boom, that should have been a deal breaker. Let's just say that I did my valuation based on $500K in debt, it turns out there was a million, boom, deal breaker.

So, setting ruthlessly stringent kill criteria for this is what the profitability of the business must be, this is what the earnings must be, this is what the revenue must be.

Like, this is— set a bunch of ruthless kill criteria and keep yourself safe. Find somebody else in your corner to hold you accountable to those kill criteria. So, essentially create a personal board, have an advisor Go, I'm looking at acquiring this business.

Here's all the metrics. These are my kill criteria for the business.

And then before you close, go to that person and go, here's what I've learned in due diligence and have them hold you accountable.

Right now you have the exact framework I use to evaluate any business acquisition opportunity. Expertise, accretive, and accelerant. Remember, there are no shortcuts. The person who does the work makes the money. Now here's your action step. Write down these 3 criteria and ask yourself, why this? Why me?

Why now?

Before your next business investment. This simple framework would have saved me $1 million. Let it save you from making the same mistakes. And if you're serious about building unbreakable wealth, hit subscribe, tap the notification bell. I drop new wealth-building frameworks every week that you won't find anywhere else. Let me know, what's the worst passive income pitch you've ever heard? I'm Mike Brown, and remember, wealth isn't just about passive income, it's about intentional growth. I'll see you in the next one.