A Giant Opportunity In Recessionary Times, With Roland Frasier

Foreign. You're listening to Business Lunch with Roland Fraser. This is your seat at the table. Welcome to the show. This is Darren Clark, the producer, and this is episode 267. And this is a good one. Thanks for tuning in today and giving us your time. And we are going to make it worth your while because in today's episode, we've actually taken a section from Roland Fraser's epic challenge. So if you want to hear what all the buzz is about, this episode is perfect for you. So Roland shares why there's such a giant opportunity right now in buying and selling businesses, or as he puts it, flipping businesses. But before I hand you over, please hit the subscribe or follow button wherever you're listening and head over to businesslunchpodcast.com epic to sign up for more of this. All right, here's Roland.

I just like to show you how much of an opportunity exists right now because we are in a recession that has been caught caused artificially by shutting down most of the economy in a lot of different countries. Right. That's really hard on a lot of businesses. And so most businesses sell for a multiple of either their profit or their revenue. And what happens is that the multiples that are used when you get into a recessionary time like this are lower. But historically, every single time across every recession in history, I think there's 42 in the United States since the United States is founding, and I believe 18 in the last 100 years. But these multiples, they increase as the recessions pass. So our goal is to ideally acquire when things are inexpensive and then to think about selling when we get closer to the peak. Now, you don't have to time that perfectly or anything. It's just to show you that there's a great opportunity to acquire right now. So it's a lower multiple. But not only that, the profits of these businesses are lower right now. So that's what creates to me this giant opportunity that we're talking about here today. Okay, so a little bit too about my experience and my epic journey. This is something that I do all the time. I just closed a deal this week to acquire part of a company that's doing $50 million a year and $10 million in EBITDA without any money out of pocket. So this isn't something that I did 30 years ago, and I'm just teaching about it now because I'm not doing deals. I'm doing deals all the time. And we've acquired quite a few companies during the crisis that's going on Right now. So just a little bit about the history though. In the 80s I was doing, yes, I am old. Back in the 80s I was doing manufacturing acquisitions using a technique called LBO, which is a leveraged buyout. And that is something that was super popular during the 80s. Then as things progressed, I was doing retail workouts, particularly in the restaurant business in the 90s. So that's basically the recession of the 80s. The opportunity for me was manufacturing, machine manufacturing, in particular companies. In the 90s it was retail workouts, primarily in the restaurant industry. In 2000 when the DOT com bust happened and there were all of these companies that were tech companies that had received a lot of funding and then just kind of the value disappeared, I was doing lots of reorganizations of those companies. And then as the Great Recession we call it in The United States, 2007, 8 and 9, when the subprime lending crisis all hit the fan and Lehman Brothers went out of business, there were tremendous opportunities to do roll ups. And so I was doing quite a few real estate roll ups during that time. And now we are in another recession and pretty much everything is on sale because everyone has been impacted by shutting down most of the economy in so many different countries. And so right now we're AC SaaS companies. In the last 30 days, we've acquired two SaaS companies. We're acquiring media, which I'll talk more specifically about, real estate publishing companies and companies that have mrr. MRR stands for monthly recurring revenue. This is revenue that comes in consistently month after month. Okay, now here's something to think about. Despite the downturn in the global economy, there's a lot of cash that's sitting on the table for M and A. Why do you care about that? Well, you might be in this just to acquire a company that will provide you with, you know, with money and profits and distributions and things like that. That's cool. I'm in this game not just to acquire companies for that, but I also want to sell them. And so I just want you to know that should you decide that you actually want to get into this fun process of flipping companies. I flip companies like people flip houses, right? You hear a lot about that flipping houses stuff, but you don't hear a lot about flipping companies. But there's a lot of money that is sitting on the sidelines that's available to buy companies that fit a certain criteria. But the first thing to think about is that There is about $2.5 trillion in private equity money. Private equity that's just companies that are set up as a fund to buy and sell companies. So they have a very particular buying criteria that I'll share with you here in a second. But think about that $2.5 trillion sitting on the sidelines in cash to buy these companies. And if you go into corporations, there's another $2.4 trillion there. So you're talking about about US$5 trillion that are sitting on the sidelines looking for deals to buy. Tremendous opportunity should you decide that you want to get into the flipping company game. Okay. Now, it was really good. The opportunity was really good before the crisis, and it has only gotten better as a result of everything that's going on in the world right now. The very first thing that I would like for you to think about is that there are, in the United States alone, in the United States alone, 50 million baby boomers that will be retiring over the next 10 years. One thing also that I'd like to point out is that I cite everything I say. I like to support every statement that I make. I'm not going to make something up on the spot. They say. The joke Is they say 97% of all statistics are made up on the spot. Right. I don't do that. So 50 million baby boomers, according to the Insurance Retirement Institute, retiring over the next 10 years. In addition to that, 12 million of those own businesses. Right. And again, that's from Wealth Management Report. Now, that means that there's a lot of businesses that are going to be available to acquire. As a matter of fact, 4.5 million businesses in the United States alone worth over $10 trillion are going to be transitioning over the next 10 years. And last but not least, and this is really interesting and shows you where our opportunity is, is that only 20%, only 20% of those businesses that go up for sale actually end up selling. And that's from Biz Buy Sell Insights. So think about that. This is just in the United States, and this is a global phenomenon, Right. In the United states alone, though, 50 million baby boomers with 12 million businesses are going to be transitioning. About four and a half million of those businesses over the next 10 years, $10 trillion in value. And despite the fact that all of these people are going to want to sell only 20%. So if we multiply this 4.5 million times 20%, that means only about 900,000 will sell traditionally, which means that the remainder, which I think if my math is right, is 3.6 million businesses are available for us to buy, for us to acquire. Okay? Using the creative things that we'll be talking here. So now is the best time and ever. It's the best time ever. And what we're really doing is turning crisis into even more opportunity here. It's kind of fun when you think about crisis because it comes from the Greek word crisis, which means a turning point in a disease that will either result in recovery or death. And for a lot of business owners, this thing is going to result in the death of their business. Right? But what we are designed, what we are intending to do is, is to help these businesses recover. So let's take a look real quick too, at returns. To me, I like to think about my return on effort. What is our return on effort so that we're doing the things that are going to give us the greatest reward. Typically here in the United States right now, if you look at cash, investments are very, very low. The interest rates are actually really, really low for returns on these things. And they're kind of trending down right now, right? If you had invested in the standard and poor 500, which is a stock index here in the United States, you might use FTSE or one of the other ones. If you're international, that's about an 8% return. And real estate is going to traditionally return between 10 and 12%. But the returns when you're acquiring companies for no money out of pocket are actually infinite because you're investing $0, right? So your ROI is infinite there. But even if we were to buy traditionally companies, if we were going to do it the old fashioned way of paying cash for them, you know, it's really going to average for you, about a 44% annualized return on your money. So why would you buy versus starting up? Because a startup is free, right? You just start it up. Whereas if you buy a business, and remember, we prefer to say acquire versus buy, because what we're really trying to do is acquire for no money out of pocket. But why would you buy versus starting up? Okay, so the first thing is there's a lot less risk, right? You can imagine that it's less risk because it's already going, right? So a lot of startups fail, but not a lot of existing businesses that are acquired fail. So there's less risk. There are a whole lot more financing options. It's really hard to get funding for a startup. There's a very few ways of doing that. Venture capital funds, angels, that kind of stuff. There's a ton of ways to acquire businesses that are already existing because there is less risk, right? That Makes sense. The other thing that you get the benefit of is brand recognition. Brand recognition is another. You don't have to build a brand. Think about how much money it takes to build a brand. One of my friends, Tai Lopez, buys dead brands that have invested tens or hundreds of millions of dollars to create a name for the business and then they've gone out of business. And so he goes and buys the brand and then restarts it online with not a lot of money. So he has acquired dress barn, Pier 1 Imports. He just bought Radio Shack. Right? That's an actual cool strategy. It also get instant customers. When you're buying a business, you don't have to go out and find new customers because they already exist and those customers are already buying. Therefore you have instant sales and instant profits, which are good things, right? You also have all the contacts that you need. You don't have to go and find the suppliers and the distributors and all of that. You also get instant systems and instant employees. So. Okay, a couple of more reasons why startups suck. I just really want to convince you to stay away from startups initially because they have a 90% failure rate over time, right? 10% of them failure one, 90% don't fail year one. But that's actually kind of sucks because if they would just fail instead of kind of lumbering along and taking your time and your money and your effort, it would be nice to have it sorted out Sooner. Unfortunately, another 70% fail in years two through five and then another 10% over the years six through 10. And another interesting fact is that the venture capitalists with all of their degrees from fancy universities and investment banking houses and expensive lawyers, they still fail. Still fail 75% of the time, right? This startup game is not an easy game to play this. So some of the reasons why 42% no market demand, they just, they, they didn't check to see if there was any demand before they start. A lot of them are unfunded. A lot of them have a hard time finding the right team. 19% of them get out competed. A lot of them never get their whole price and cost issue down like how much can we charge versus how much does it cost to provide this service. 17 of them never figure out how to deliver a full a product that's actually friendly. Another 17% have products without business models and 14% with poor marketing. So lots of reasons that businesses fail. And in terms of your chances of success, this is interesting too. This is why I do not do startups. First time founders have a 10% rate of success, that means they have a 90% failure rate, right? 90% fail, fail. Previously unsuccessful business entrepreneurs who have hopefully learned some lessons. Hopefully learned some lessons. They only fail 80% of the time. VC, I mentioned fail 75%. And previously, if you want the best chance of success, right? A previously successful founder, they only fail 70% of the time, right? Pretty high failure rate. So let's take a look at how this kind of shakes out in terms of cash. Another concept that I want you to think about too is where you sit in the business and where you are going to operate. Super smart guy lives right down the road from us, Michael Gerbers, and he wrote this book called E Myth, right? Which was basically the concept was that most people, most people are working in the business. They're sweeping the floors, they're ordering supplies, serving customers, making coffee, right? Most people are doing that, working in the business. And so even if you haven't heard of his book, you've probably heard people tell you that you should be working on, not in it. You should hire somebody to operate the business for you and install systems and create processes and all that kind of stuff. And, and that's great. The thing that you're doing though, in both of those, whether you're working in or on, you're really focused on the selling or service of the business, okay? You're thinking about selling the product or service of the business. That's what you're focusing your efforts on. When you work above the business, then what happens is you're finding investors, you're acquiring your competitors, you're integrating your supply and distribution chains, you're acquiring new verticals and expanding into new markets through different means. What you're doing there is you're realizing that the true product is the business itself. The true product is the business itself. We want to think about selling the business, not selling the product. We want the people who are working in our business that we own selling the product or service. We want to be thinking about how do we increase the value of the business and how do we actually sell the business itself. That's a huge, huge, huge mental shift, right? But one that I want you to make because that's where most of the money is made. That's where most of the money is made. Okay? So if you don't want to flip businesses, you can go and buy a company, acquire a company, no money out of pocket, and just continue to own it. I've got one company I've owned for almost 30 years now, and that's okay, Right. But if you really want to get, in addition to the profits from the company, a significant bump on the multiple, imagine acquiring at one to five times profit and selling at 12 or 13. It's a wonderful, wonderful day every time you make that sale. Now, you might be asking yourself, why does anybody pay so much more? And the answer is, the reason the private equity pays more is it's bigger deals. And there's a lot of competition among the private equity firms. There's thousands and thousands of these firms to buy deals that are over $10 million on average and sales and over $2 million in EBITDA or profit. So that's because it takes just as much effort to do the tiny little deal as it does to do the bigger deal. So they want to focus on how can they get higher returns. And they also have a lot of money. They have to place, remember, trillions of dollars sitting on the sidelines. So they don't. They want one transaction that will take some chunk of that. Okay, now why will they do that? Because ultimately, they're looking to either take the company public or sell to a public company or something like that. Okay, so your arbitrage opportunity, or our arbitrage opportunity, one of the big ones comes from companies that are closing every single year. Before COVID 595,000 businesses per year simply close their doors. Simply close their doors. And. And this has only gotten worse since COVID Right? So this whole thing has accelerated the opportunity and accelerated the crisis and also accelerated the good that we can do by coming in and acquiring these businesses that would otherwise close. Now, what are the top 10 reasons that businesses close that they just close their door? Like, why wouldn't they sell money? Number one reason, right? Money doesn't work, doesn't mean that the business isn't good. It might very often mean that it's not producing enough money. Right. That they have other opportunities to deploy their efforts and receive better money. But retirement, relocation, burnout, shiny object syndrome. Most entrepreneurs, when you go to a meeting of entrepreneurs, like a mastermind or anything like that, the least interesting business in the room to them is theirs. Everybody else's business sounds amazing because they've got these sales and these profits and everything else. But they know we all know the problems and challenges of our businesses. We don't think about the challenges of the other businesses. It's like, my mother used to go to the casino, and she would be like, I won this much money, and I won this much money. And I'm like, how are these casinos building? These billion dollar structures, when everybody's winning all the time, Right. Nobody tends to talk about the losses. So when you, when you're in your business mastermind or getting with other people who are business owners and you think, you know, gosh, their businesses are so great, just remember they're not talking about all the other stuff. Another reason that they sell is it's actually not so much that they think it's an upcycle and they're going to make big profits, but they look at what's coming and they think that they're approaching a down cycle and so they want to sell. And there's a lot of people that are trying to do that right now. I mean, it's a little late. Since we are in the down cycle. Partners as well can be a big challenge and of course, death. Okay, so those are the reasons. Now that's who we're looking for. By the way, our ideal seller is suffering from something that's in this list of 10 reasons. Okay, but these are really our ideal seller. We're looking for people who are motivated to sell. So this is why it's really important. You gotta have the motivated seller. That's why we don't like going through brokers, because the seller who is going to a broker and listing their business is in the highest point of the expectation curve of selling the business. What you'll find is that there's a curve, right? And the sales price versus time, the expectation of a seller is going to be significantly higher when they first list. Just like when you go to sell your house, you're like, this is a great house. I'm going to get all this money for it. And then the market hits and months go by and it doesn't sell and your expectation curve goes down. So we don't want to hit people that are at the highest point of the expectation curve when they've just listed a business with a broker. And the purpose of a broker is to create an auction environment with lots of buyers who are going to pay the most upfront cash for a business.

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