What to Consider When Buying a Company (Part 1)

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Hey, Roland Frazier here. And today we are talking about what are the most important factors to know when you're buying a business. So there's a few of them and we're going to talk about them. The first one, the first question that I think is really important for you to answer is how are you going to define your acquisition criteria? So acquisition criteria is the first thing that any acquirer is going to do, like A professional acquirer like a private equity firm or a SPAC that's into acquisitions or a family office, they're always going to say, well, what kinds of businesses do we want to buy? Because if you don't know what kind business you want to buy, it's very easy to get overwhelmed, particularly when you follow the plan that I have, which is generally, how can we acquire with no money out of pocket? Because we're not constrained by having some fund that is a finite amount of capital that we can acquire with. We effectively, when we're not using any capital at all out of our own pocket to acquire, we effectively have an unlimited checkbook. So a lot of times when, when I teach people how to do that, they'll go out and just acquire a whole bunch of unrelated things. And so they end up at the end of the day with, gosh, a bar, a soap manufacturer and tour business and a sandwich shop. I mean, just like, it's like they don't really. Or. And maybe junkyard and manufacturer. It's like they have nothing to do with each other. So that's kind of hard. And it's easy to do because your kid in a candy store, once you know how to do that, but it, it really is smarter, I think, and will save you a lot more headaches and make life easier for you if you establish what is the criteria for the thing that you want to acquire before you just go out and start unleashing your tools of acquiring without money out of pocket on the world. And the first thing that I think is good to do is to determine. I use kind of a matrix to do this. And so the very first thing, and this makes a lot of difference, and it sounds kind of cliche, but find something that you like. Make a list of the things that you actually enjoy. And so I do this in a, in like a quadrant. You can do it on a piece of paper with, you know, four different sections, however you want. The very first thing that you want to brainstorm is what are the things I actually like to do? Because being an entrepreneur is hard. Even if you acquire the company with no money out of pocket, once you own it and it's profitable, business is hard. It's. This stuff is going to happen. There are going to be challenges with people. There are going to be things that happen that you didn't think about that are surprising that you can deal with, but it's a whole lot more motivating to go forward and deal with it. If you actually have an interest in the kind of business. So what are the things that you're passionate about? What are your hobbies and interests? Take an inventory of those things first. And that to me is the first step of how to determine your acquisition criteria. So the second step of determining your acquisition criteria, to me, I think it makes sense to say, what do I have experience in in the past? So separately, I would brainstorm this. The first thing that I brainstorm is what are the things I'm passionate about. Now we're talking about, I don't care if you're passionate about it or not. Just what do you actually have experience in? And just kind of brainstorm. Write down all of the, the types of things that you've actually done. So I've done digital marketing consulting with respect to Facebook ads. I have helped companies hire other people. I've worked in a tennis shop, you know, whatever that list of experiences that you've got, inventory that next. And that will give you a pool of experiences that you've got that you, you can say my experience here would be helpful to me in acquiring a particular business or in operating it or in owning it. That's the second step for acquisition criteria. So the third step for acquisition criteria is similar to your experiences, but it's more skill based. So what do you have knowledge, training and skills at that you can inventory? So you know the things that you actually have knowledge about. Now you might have trained, you might have taken a course in accounting, but you've never been an accountant. So you wouldn't have accounting experience in your experience inventory, but you would have accounting in your skills knowledge category. So this is going to help too because it's going to show you the things that you actually are good at. And these are specific skills. It might not be like a particular business, like I've run a tennis shop, but if you ran a tennis shop, you have retail store operational experience. So that would be something that you would put on that list. So now we've got an inventory of the things that we're passionate about that we're interested in that are hobbies and interests. Then we've got an inventory of the things that we have actually done. We've lived it, which is completely different than knowing it. And that is our second category. Then our third category is the things that we actually have knowledge, training and skills at. You could also say these are my superpowers if you wanted to. That's the third inventory that we're going to do. The fourth inventory that we're going to do with our acquisition criteria determination Is we're going to say what are all of the contacts, connections and networking resources that I have access to? So here we're going to say I know the CEO of a consumer products good consumer packaged goods company and I know the owner of a manufacturing company and I am a member of the War Room Mastermind. And there's a bunch of people in there that own businesses that share. I'm a member of ypo, the Young President's Organization or EO Entrepreneurs Organization. This is basically the contacts that you feel, the business contacts that could be helpful to you in business. And you're just brainstorming these things. So now you've got a category, a categorization of four types of things that are going to help you determine the type of business that you might want to buy. And so I'm looking here to find common threads between the things that you're passionate about and interested in, the things that you have experience in, the things that you have skills, training and knowledge about, and the things that you've got business connections in. And if you can line up all four of those. So I go through after I've brainstormed all those things and then circle the passion things that are interesting to you. And then when you're going through the other three lists, think about with respect to, let's say you're passionate about travel. So then think about as you go through the other three brainstorming lists that we talked about, where do I have experience that could help me in owning a travel related company? And then where do I have training that could help me or knowledge or skills that could help me in owning a travel related company? And then last but not least, where do I have connections that could help me in a travel related company as well? And then that's going to be the very first level of determining our acquisition criteria. Okay, now then we go to the next thing we say, how do I select a target type? Okay, so what do we mean by target type? Well, the type of company that you're going to acquire can fall into several different categories. The biggest, broadest category that I start with is am I going to acquire a company that is no longer existing, one that's been closed down? Am I going to acquire one that is not currently profitable, that is a turnaround situation, or am I going to acquire a company that is currently just barely breaking even or profitable? And I put the break even or profitable in one category because those are really the companies that I would argue you should focus on unless you have turnaround experience that is a very specific set of skills, as Liam Neeson would say, a very particular set of skills that, that you would need to possess to be able to turn those around. That's hard. It's certainly harder than acquiring a profitable company and there are plenty of profitable companies to acquire. So as you're looking, I would screen out the ones that have already closed down because they're going to be, have to be resurrected. It's almost like having a startup. It's a little bit better, but it's almost like having a startup. And we're not about acquiring startups. The turnaround category, so many skills and so hard to do. Let's not do that right now. I think it can be super fun. By the way, I've done lots of those and I like them. But it's way, way harder than going through and acquiring one that's at break even or profitable now. Then we get to break even or profitable in that category. If it's just barely breaking even and you don't see things that you could do very, very quickly, 30 days to turn that into a company that is actually making a profit, then I'd probably pass. I would look for one that is already profitable. Okay, how profitable does it need to be? I'm so glad you asked. Okay, so then we say, how do I decide how profitable a company needs to be for me to want to acquire it? Well, I don't really care that much about sales. I care about profits. And there's two types of profits that we talk about. There's sde, which is seller discretionary earnings. There's. That's how profitable is a company that is owner operated, where the owner is required to make the business go. In a business that is professionally managed, where the owner's not required, we use EBITDA or Earnings before Interest, taxes, depreciation and amortization. So I'm going to say, okay, I am interested in a company that is profitable and has either SDE or if it's owner operated, or EBITDA if it's professionally managed of a certain amount, what do I want that amount to be? Okay, the thing that I do to calculate that is I say how much do I want to pay myself for doing this deal on a monthly basis? So that's the very first thing I'm going to do. I'm going to say, let's say I want to make 10,000, I want to pay myself $10,000 a month because I'm going to spend some time tweaking this business and I'M really not interested in a business that I can't get $10,000 a month from. So that's going to be my new target type is going to be a company that is profitable, that's making at least $10,000 a month profit, because I know I need to spend that to pay myself. But in addition to that, I want to say, what am I going to do with the company? Am I going to just let it go as is and kind of operate like that? Or do I actually see some growth potential, which ideally you do, and there's going to be a little bit of investment to get the company to grow so that it will be worth more and maybe ultimately I sell it, or if it's worth more because it's making more profit, it'll be able to pay me more, which all, all good things. So the second thing that I'm going to look at there is I'm going to say how much money is going to be required or do I want to budget to be able to spend on growth? And that might be anything from increasing advertising budgets to increasing staffing levels to acquiring capital equipment or something like that.

Right?

New product development, product acquisition, maybe even acquiring other companies. But those are the two things I'm going to look at. How much do I want to pay myself? Let's say I want to pay myself 10,000amonth. Great, that's 120,000 a year. And then let's say that I want to be able to spend $10,000 a month on growth activities. Then that's another $120,000 a year that I'm going to need to have available.

So.

So the 120,000 I want to pay myself, plus the 120,000 I want to spend on growth is going to mean I need a business that at least has a profit, an SDE or an EBITDA of 240,000 a year, 120,000 for me, 120,000 for growth. So that's really how I'm going to select what kind of company I'm going to go after. I'm going to say I don't really care what the sales are so much, but I have my acquisition criteria, which I talk about earlier, and I have an idea now of how much I want to pay myself and how much money I have to be able to dedicate to growing the company. I add those two together and then that gives me pretty good additional acquisition criteria in terms of profitability. So then I'll. I'll say, what are the businesses that fit my acquisition criteria that also have profitability of $240,000 or more. So that's kind of how we go about that.

Foreign.

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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.

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