What to Consider When Buying a Company (Part 3)

Hey business Lunch listeners. This is Hector Santhia Stebon and welcome to today's Snackable Episode. This is the third and final part of the what to Consider When Buying a Business series. And once again, this is Roland's expertise and a topic that Roland has a ton of knowledge and information to share on. So if you haven't listened to the first two episodes, definitely go back and listen to those. But I'd also encourage you to go out and connect with Roland on social media. You can find him on Instagram, you can find him on LinkedIn, you can find him on TikTok and let them know what topics you want to see on future episodes. As always, thanks again for coming and joining us at the table. We're going to get into part three right after this. How much more successful would you be if you had lunch with insanely successful entrepreneurs who shared their biggest secrets on how they think and achieve success? Well, now you can Here, successful entrepreneurs reveal their step by step strategies and other fascinating stories.

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Because this is Business Lunch with Roland Frazier and Ryan Deiss.

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To get started again, find common touch points. You're building rapport here and also they're going to tell you things that are going to be more interesting to you to take notes about that will help you as you craft an offer to think about buying their business. So that's really the first two lists of questions that you're going to ask as you encounter a seller. Now once you've had that conversation, the next set of questions is going to be more specific and I have a target information data sheet that I fill out for these things. It basically asks about the what is the top level sales, what is the profitability of the company? And then other questions about what are the assets and liabilities of the company. But not in a financial statement way because you don't need the detail that's in a financial statement to know if this is a good company. But I am interested in what kind of cash is in the company, what are the accounts receivable of the company, what are the accounts payable of the company, what long term debt does it have, does it own any real estate? What are the Other assets that it has in terms of like machinery, furniture, fixtures, equipment, inventory. Is it a business that has inventory? If so, do they carry an inventory of raw goods? What amount of work in process do they have at any given time? What's the amount of finished goods inventory they have? Do they have vehicles? Those are things that are important to me. How many employees they have is important to me because the more employees they have, the more likelihood they have good managers that are going to potentially be able to run the company. Because I don't want to run it. If you want to run the company, you might not care as much, but you still want to know how many employees they've got. So. And then I want to know what is the owner's reason for thinking about selling or leaving the company? And I want to know what are they going to do going forward? For a few reasons. One is it's going to future pace them into the life after the business, which is something we want them to do because we want them to get excited about life after the business. Man, if you didn't have all the headaches and hassles of the business now and you always wanted to travel with your husband, wouldn't it be great if you could sell this business and do that? And then she gets excited about that and you have built a common goal that you're both going to do. Plus you're going to start then saying, well, how much do you think it's going to take to do that? Which is going to give you valuable information about how much money you're going to have to find to give the seller at closing. Because remember, we don't do zero down deals. We do zero money out of pocket deals. We'll go find that money from within the company or from someplace else. But we need to know how much it is that we need. And it's probably not the full amount of the sales purchase price, right? It's probably something less than that. If they want to take that trip, maybe that trip costs $100,000 and maybe they want a million dollars for the company, well then that means I might be able to get 90% seller financing, which is going to be great because then I don't have to go to the bank to get that money. I only have to come with 100,000. And I can find that probably from other resources in the company or other strategies and things that we can talk about later. So that's really the type of questions that I'm going to ask. So then the next thing to think about when we're thinking about how do we go about buying a business and what are the factors that are important is how do you start the research and outreach process? And so I think a lot of people believe that businesses to acquire can be found through online or offline brokers of businesses. And the truth is, is that those are really the worst deals for you to think about buying. And here's why, when you think about, when you list a house, because most, many, many people I think that are listening have gone through the process of owning or selling a house. And, and if you haven't, then this will still, I think, hopefully help be a good analogy. But whether it's a business or a house or a piece of real estate, when you first think about selling, you're thinking about what it's worth, and you're typically thinking that it's worth more than it's worth because it's your baby or it's your house, it's the business that you started from scratch, or it's the house that you loved and grew up in and your kids were born in and you know, or you got married in or whatever. It's a higher expectation of what you're going to be able to get. Generally, when you first think about selling anything, car, jewelry, anything, then what happens once you've been on the market for a while? So when a business broker is going to someone and saying, hey, I'd like to list your business for sale, or when someone comes to a business broker and says, I'd like to sell my business or house or whatever, right. The, the person who's the representative, the broker is typically going to say, well, what do you want for it? And then the person who's selling is going to say, either I don't know, what do you think I can get? Or they're going to say, I want X. And the broker then has to figure out how can they keep the seller's expectations reasonable, but also how can they get the deal because they need to get the listing. And they're not going to get the listing by saying, well, it's probably going to take a couple of years. And I don't know that you're going to get anywhere close to what you're thinking you want for it. So there's a, there is a, there's a compulsion to allow somebody to start out by listing a business or property or anything for sale for a higher price than the person who's selling it actually thinks they can get for it. And that creates an expectation in the seller that they're going to get more for it than it's worth. So you're fighting against the expectation of the seller in that case. Now also, when they're listed with a broker, they're going to need to get enough to do whatever it is that they want to do after the sale. And they're going to be thinking and entering into the calculus of that decision how much they're going to have to pay the broker. And so if the broker is going to get a 10% commission and they need a million dollars and they sell for a million dollars, they're going to find themselves $100,000 short. Right. So the, that's, that's a challenge. Now as time goes on and as the broker who's listed, the business brings them offers or doesn't, if no offers come in, they're going to be like, oh my gosh, I'm, I don't, I guess I'm not going to get anywhere close to what I wanted for this business. And when they do get offers, they're likely to be significantly less than the asking price. So that will also help them. Dag on it. Why do people keep coming in and offering me low balling me and not giving me enough money for my business because it's worth so much more. But the truth is the market determines what the business is worth. So if you come, if you have someone who has received multiple offers that are not close to what they have asked for the business and they've turned those offers down, that is going to be helpful to you, but you're still going to be paying the highest possible price that the broker can get. Because the broker's job is to create an auction environment where as many buyers as possible are competing to buy the business for the highest price possible and they're competing against each other. Wouldn't it be better if you could find off market deals that are not listed or deals that were listed but the listing has expired so that they are no longer listed, but they have gone through the expectation curve process so that they're much, much more reasonable in what they'll accept. And keep in mind that 80% of businesses that are listed do not sell. So in thinking about how do you start the research and outreach process, one thing you could do is you could find businesses through online business sites like Biz Buy Sell or even Flippa that have been listed where the listing has expired if that information is available or that were listed a long time ago if the listing date is available. But that's still to me, the, one of the hardest ways to find businesses, I think it's much, much easier to do it organically. You're probably not going to find businesses by running an ad and saying I want to buy businesses. You're probably not going to buy businesses by having a marketing funnel and running ads to that and then sending people through that funnel. Because it's a very personal process. And there's just. Even though there are millions and millions of businesses that are for sale at any given time throughout the world, there are not really efficient markets for listing and finding those. They're, they're very, very inefficient. So most of this is happening through word of mouth and through networking. So you just have to understand that if you really want to find the best deals, you're going to have to do it through networking. Now the good news is that networking doesn't necessarily mean you have to join a networking group because you hate that, or go to the chamber of commerce meeting or the Lions or Elks or wherever it is that people are gathering. But you can do those things. And the more that you meet people and tell them what you're doing. I'm an investor. I'm always interested in buying and selling businesses. Particularly right now looking for one that's in the Pacific Northwest that sells soap products, right? Whatever it is that you're looking for, more people you tell that, the more likely that someone is going to know someone who knows someone who's going to refer you, somebody who has that business you're looking for for sale. So network is really critical. So some of the places that you might think about looking for that would include just friends and family. One of the deals that one of my friends bought was a retail store that his nine year old son told him about. His nine year old son said, you know, dad, the store's closing. It's one of my favorite stores. I hate to see it close. Is there anything that you could do to help keep it open? And he ended up going down and acquiring that business and it's turned out to be a really, really cool acquisition for him. So friends and family, you have to tell them, but your email signatures, all of the contacts that you've got socially, you can socially post on any social media that you've got saying, hey, I'm looking for a business like this right post. Post your acquisition criteria. We've acquired several real estate brokerages and related companies simply by posting in our real estate site that we're looking for those kinds of companies. So you have to tell people. You can go to, you can go to networking groups, there's BNI and other groups like that. There are meetup groups. So you can go to meetup.com and find through keyword searching groups in your area that are doing this. They're angel groups. There's all kinds of, of places that you can go. You can ask your contractors, your employees, you can ask consultants in the area, you can ask mastermind people, you can join masterminds. You can go to entrepreneurs organization EO meetings or ypo, YPO Young Professional Young Presidents Organization meetings. There's all of those places. Ask investment bankers, ask business appraisers, ask accountants, attorneys, financial plan wealth advisors, all of those kinds of things. Trade associations, trade shows. You plug yourself in. The more you plug yourself into the industries that you're interested in doing acquisitions in, the more likely you're going to get referrals. The more you let the world know that you're interested in making an acquisition, the more likely hood that you will get a referral. So that's really the best way to start that, that process. And then when you get a referral, you reach out to them and you ask them the questions that I've talked about in a different part of the podcast. And then last but not least, how do you actually find the people to make contact with? Well, referrals are the best. That's, that's the easiest way to do it because you're getting introduced to the person with someone's arm wrapped around you saying this is a good person who's interested in your company. But if you're doing more cold outreach, then there are several things that you can do. Probably the easiest thing if you're in the United States would be to go to the SEC states.com site S E-C-S-T-A-T-E-S.com and that lists all of the 50 secretaries of state for each of the states in the United States. And the Secretary of State is generally in our country in the United States, where filings of business entities are done, whether it's a limited liability company, an llc, a corporation which is typically an inc, and that's whether it's a subchapter S or C corporation. For those of you know what that means, doesn't really matter. Limited partnerships, limited liability partnerships, all of those entities are typically registered in and issued by the Secretary of State in the United States. Now in the UK it's Companies House in Australia and other places it will be different. It might be In a province, it might be a countrywide thing. It just depends on where you are. But sextates.com is a good place. Hoovers.com is a place that you can get information that's typically paid, but that's a good place as well. And when you go into these sites, zoominfo.com would be another good one. And that's domestic and international as well. Those are good places that are online resources that you can go and find out who are the officers, directors, and sometimes who are the owners of the business and their names. Phone numbers often. And addresses very often are listed so that you can then mail them a letter or call them or at least know who to go find to reach out. And how you're going to reach out depends on what you're good at. You can send a physical letter because nobody really sends those anymore that for. For that kind of thing. So you will definitely stand out. And a lot of times the addresses that are listed in the filing document or the filing agency records are home addresses. So it's not even a business address, which is really cool. Now, you need to be careful.

Hey, business lunch listeners. We're going to get right back to the show, but Roland wanted me to invite you to a brand new training that he's doing on acquiring businesses with no money out of pocket. It's something that he's talked quite a bit about on the show, but he's doing a free training where he's going to walk through the entire process. So if you want to get access to that, go to businesslunchpodcast.com EPIC. That's businesslunchpodcast.com Epic. And you can get signed up.

Not to sound too stocky when you're reaching them out. I tracked you down and found your home address and now I'm emailing you here. So sell me your company. That's. That's kind of scary. So don't do that. That it's better to say that I found I'm writing you at this address for confidentiality and I found this address in the public records. And if you say that when you're doing those outreaches, it'll save you a lot of hassle from people that are freaking out out because you have their home address. So those are some online resources. But the easiest thing to do and what I start with first is just call the company and say to whoever answers the phone, hey, who's the owner of the company? I need to, I have to send them some information. They'll tell you very Often. Right. And then you have that information. You can also look on the website of the company. That's another easy thing to do. You just basically say under the contact us information or team or about us page or any of that, very often they will list the, particularly when it's team, it'll list who the owners, founders are and that's who you want to talk to. You can also Google and look for information about occupancy permits, business licenses or other things like that. All of those typically have the owner information on them. So those are just some, some places that you can go to start that outreach and then you send them information that we've talked about in some of our other episodes. So I hope that's helpful to you that all of those things go together. And I'd say that those are really probably the five most important factors that you should know when you're buying a business. Hope that's helpful and I'll see you soon.

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Thanks.

You've been listening to Business Lunch with Roland Fraser. If you're enjoying the show, let us know by subscribing and leaving a review. And for more information go to businesslunchpodcast.com thank you for listening.

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