Mastering The Business Acquisition Game: On Buying And Selling Businesses With David Barnett

Foreign this is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Good morning, good afternoon and good evening everybody. Welcome to this episode of the Note Closure Show. As always, Scott Carson jacked up today and excited to have a great episode. This episode goes out to all those folks who have ever reached out to me, called to me and said, hey Scott, I'm looking at buying a business or I'm looking at buying a note on a business or I'm looking to sell my business on terms. Can you help me? Our special guest today has over 20 years of experience in helping entrepreneurs and people buy businesses, sell businesses and find businesses. He's also just an amazing wealth of knowledge because he's also the author of seven different books about small business transactions and local investing. He's the host of the YouTube channel, which is with hundreds of videos about buying, selling, financing and management businesses as well. And you can also find out more information about him anytime. His blog david c.barnett.com so we're honored to have my buddy David Barnett join us on the podcast what's going on David? How you doing today?

Well, that C is important because if you don't use the C, you're going to find out about that serial killer on Netflix. So it's a critical thing there. It's called differentiation in marketing talk. Thanks for having me on. I love to talk about this stuff.

Yeah, no problem, man. We connected through our mutual friend Clifton Corbin. A few weeks back we did a the missing panel from fincon that's on our podcast. You guys hear David talk about how he uses LinkedIn on that stuff, but really enjoyed your discussion at Fincon about how are you leveraging YouTube and other things like that. We won't get into that today, but really love the mindset and for folks, you just told me this beforehand. I know this. You actually spoke at in Vegas at the Paper Source convention if you years.

Ago before the pandemic.

Yeah, Bill McCarr, we've had him on the show once or twice as well too, and he's a very good wealth of information. But so many people out there are looking for opportunities. There's a lot of people hurting, not just people trying to make ends meet, but also a lot of business owners that are maybe struggling or they've gotten to the point where they, hey, they've had this job for a while that they don't necessarily want to hold on to anymore and looking to move it. Before we get into that, can you share a little bit of your story, how you got into doing what you're doing? Because it's a great backstory.

Yeah, sure. So I've always been a person interested in business. I mean, I was one of those kids that had all of those flyer routes and we used to shovel snow as a kid growing up in Canada. And even at university I had little side hustle businesses that I was doing all the time. And my real big exposure to small business came after university when I started working for the Yellow Pages. This was back in the 90s when if you had a leaky pipe and you needed someone you couldn't reach for your smartphone, or if you went on to Google, you'd find a plumber in California. If you needed a plumber down the street, you had to open up the Yellow Pages. So I got to go out and meet the owners and managers of all the local small businesses that we all know and we all use every day and got to ask those people, how do you make money? What kind of customer do you want? Who would you like to be on the phone the next time it rings? And so I would help create those advertisements and develop this sort of mile wide, inch deep expertise about the world of small business. Just having experience, experience talking with all these different people. But I could see where the future was going. I knew where Google was coming from. And I realized the Yellow Pages was not the place to be long term. And so I left around 2006 and I started a business with a partner and we did that for two years. And I sold that business very naively. I didn't know anything about selling businesses at the time, but I knew that I wanted to get out of that business and I sold it with a good deal of seller financing as it would happen. But I got into becoming a finance broker. So I was then helping small businesses obtain capital leases, operating leases, lines of credit, bank loans, what we call factoring facilities, which is the sale of accounts receivable. I was doing that with people until the great financial crisis hit. And literally half the sources of capital that I was using, the businesses that provided this money, they disappeared. And so then what was I going to do? Well, in that time when I was helping people find money, I. I kept running into people that wanted to find money for an entire business. And that's when I started to meet people in the business brokerage industry. And I didn't know anything really about business brokerage at that time, but I had a business degree and I had some sales background, small business background. And what I knew for sure, Scott, was that the people that were trying to put deals together also didn't know anything about business brokerage because I kept seeing these really poorly structured deals. I kept seeing deals being put together with no consideration for things like operating capital. I saw people lose deposits, I saw people agree to terms that didn't make any sense. And I thought this is a place where a pro could really like, do well. And so when I decided to make the pivot, that's what I did. So I joined up with one of the big international branded business broker franchises because they gave me access to training. So I went into the IBBA's program and in over a two and a half year period worked under the wing of a more experienced broker, got my certification, and then I ran that brokerage for three and a half years and sold 35 companies for other people. And then I had to get out because it's an insane business and I don't recommend it to anyone. Because business brokerage is largely geared upon the idea of real estate brokerage, where you find a business owner that wants to sell, you may have some small engagement fee, you charge them, but largely you represent them. You talk with buyers, you show the business, and then when you sell it, you get a commission. The problem is that when you try to sell a business, it can take years sometimes to sell a business. I remember the first business I listed for sale in the end of 2008 was a fried chicken franchise. And the last business I sold at the end of 2011 was that fried chicken franchise. And I think I sold it three times, but the first two times it fell apart at the 11th hour. And it didn't have anything really to do with me, the buyer, the seller. It was always these outside influences, like attorneys, accountants, bankers, et cetera, that would ultimately determine a deal wasn't going to happen. I couldn't live that way. So I got out of it. I became a banker, in fact. And while I was doing my banking role, people kept calling me up. They were like, hey, I'm told you're the guy that can help me with this deal. Or maybe it was someone from my broker days that was trying to do a deal, looking for advice. And I just started to help people as a little side hustle, doing these consulting jobs. And when the bank Decided to reorganize. I was like, yeah, you know what? I'm going to do this full time. And that was 2016. So it's been several years now. That's when I hopped on YouTube and started making videos. And now I work with people all over the place and I act as a consultant with buyers and sellers that are moving through a deal. And I do certain consulting work, like helping to do evaluations, helping to analyze businesses that someone might want to buy. But just coaching people through the process, letting them know what is going to be expected, what questions they need to be asking when they're talking with their attorneys and accountants, just kind of guiding them through that process. Because I've been with it with so many people. And that brings me to today.

Exactly. Great stuff, great stuff. So a couple questions that popped up thinking about it. So I remember sitting there during your presentation. Oh Yeah, I sold 35 businesses over three years. I was like, oh, that's not so bad. One a month. But it's not always one a month. It drags out.

No, yeah. In those three years that I sold the 35 companies, there were three distinct periods of seven to nine months long with no closings.

Yeah.

And so I was very familiar with the workings of lines of credit and credit cards because I would end up getting into the red, paying all of my business and personal overhead and then I would sell a business just to get back to zero. And if anyone's been in any kind of roller coaster project based cash flow business before, that's what it's like. And so this is why I say that it's, it's a crazy business because I couldn't even make a household budget. Right. Luckily though, I owned three apartment buildings when I did it and that kind of gave me that cash flow stability. I don't think if I had that I would have ever gotten into it. I mentioned that because I know the tie into real estate that a lot of your audience has.

Sure. No, it totally makes sense. I mean that's. I've got friends that have been commercial residential brokers, you know, buy and sell on residential real estate, which is pretty every 90 days, stuff like that. But then they've made the bump to commercial real estate and things drag out much longer and they're not used to that period in between. You know, it takes longer to close deals and lots of things can go wrong. A ride or kill a deal versus it being. So I don't want to say turnkey a lot of times residential, but it can be in A lot of cases, you know what I mean? Another question popped up. What's the average commission if you're selling a business? I'm sure it's a percentage of whatever, of sales prices. Like a normal commission, right?

Yeah. So it's a function of a lot of different things. So when I had my brokerage, I was focused on what we call Main street businesses, which would be businesses with a cash flow to the owner of under half a million a year. And my commission was structured like this. It was 12% of business value and 7% of real estate value if I happened to sell real estate at the same time. And it is very distinctive, the difference between real estate and business. With a couple of exceptions, there's a few businesses that kind of are real estate. Your mini storages and your RV parks and your motels and your maybe special care homes. There's a couple of categories like that. But for the most part, if somebody owned a business, a retail store, and they happen to own the building, we would analyze and divide those two assets and treat them very separately. And so one of the things I would often suggest to people is let's sell the business to someone. You can then become their landlord. Maybe we'll give them an option of purchase or maybe you'll sell the building to a real estate investment organization of some kind. They don't have to go to the same person. The biggest challenge when you're selling a business is finding a buyer that has that down payment money. And if you force someone to buy your business and your building at the same time, they need the down payment for both. And what that does is it shrinks your potential buyer pool. And that's what can elongate the process of finding that buyer. So we looked at them very distinctly and that's why I charged two different rates of commission. It's funny that, you know, you mentioned commercial real estate agents when I was a business broker here, where I live, to be a business broker, you needed to hold a real estate license. And so some realtors would get the idea that because the license was the same, they were therefore qualified to sell businesses. And so with a funny thing is, are you aware of the Dunning Kruger effect?

Yeah, I've heard of that, yeah. Would you explain it to our audience? Sure.

Basically, the more you know about something, the more you realize you're incompetent. So. So the real estate agents that were more likely to list businesses for sale were the residential agents because they had no idea what they didn't know. And the commercial Realtors were actually the ones who would often refer people to me. So, so they would meet someone who would say, hey, I want to sell my business. And the commercial realtor would be like, look, I do warehouse, office, retail, I don't do businesses, but meet my friend Dave. So I would often sell the business and then refer the person right back to the same realtor to then sell the building. And it would be because once the building has essentially a new tenant in place who just signed a five or ten year lease, now that building has is a whole other kind of value proposition to an investor. And oftentimes splitting the two can really enhance the value for the seller and make it doable for the buyer where they may not have been able to pull a deal together at all if they tried to buy the whole thing in one fell swoop.

Well, we've seen it also too, we've got some friends up in Dallas that they work with, entrepreneurs who like, they run service like lawn care or other services aspect of it. And they, they don't have a lot of value because it's all kind of like a solopreneur. But the minute that they say, well, instead of you leasing your building, if you can buy your building, you add a lot of value to your business and have a tangible asset that could get financing at banks who can put lines of credit against and stuff like that too to help them out with that. So it's definitely interesting splitting the two cash flow, the business in one.

Right.

The property up.

It's a very separate thing because what you're talking about is someone with a landscape business, for example, and then they make a real estate investment. What they're doing is their business is now in two different businesses. They're now in landscaping and commercial property management, leasing. They just have one tenant, it's themselves. Right, right. And this is where if you look at the balance sheet of a corporation or an LLC or whatever, that entity is organized. Like, it may then appear as though you have these features that you're talking about, but they're still very much in two different businesses. When someone comes along to look at the business, they're going to look at it separately from the building. But you're right, there are certain advantages to owning property in some cases.

Now when you, if somebody comes to you and they're looking to buy a business, let's start with the buy side. And what are normal terms? And I know normal can vary. I mean that's a inconspicuous term and it means a lot of things. But kind of a ballpark thing. Are we talking. It's all. I mean, obviously it can be all cash or a portion of cash, portion of stock or payments. What. Do you see a lot happening with business? The purchase of a business right now?

Yeah. Okay. So if someone's going to buy a business, the first thing we have to understand is how are they doing the transaction? How are they going to take the business from the seller's hands into their own? And I'm assuming most of your audience is American, Right? And so for a lot of small businesses in the US that is going to be done in the form of an asset sale. And so an asset sale simply means that I've got a legal entity, you have a legal entity. My entity is going to buy the stuff your entity owns, which can include trade names, website addresses, what we call goodwill. All the intangibles and tangibles are going to trade from one party to another. But typically in an asset sale, certain things do not transfer, and they can be certain components of operating capital. So, for example, sometimes a seller will say, look, I'm going to hang on to my cash and receivables and I'm going to pay off all my bills. And then you'll have a clean slate when you start. But if that business owner has been operating with a net position in working capital of 30 or $40,000, that means that the seller, once he pays his bills, is going to have this extra money that he's kept. But that money was required to make the business work. So from a buyer's point of view, when you make a business purchase from that seller, what you get in the transaction from the seller is not everything you need. So in addition to the purchase from the seller, you're also going to have to put in 30 or $40,000 in cash into your own entity to make up that operating capital difference. Okay? And now what you pay the seller is typically going to be some kind of down payment and then some bank financing, and then almost always a seller note. Now, if it's an SBA financeable business, that opens the door to a lot of high leverage, which I'm not always a big fan of. And here's why. When you buy a house, you can have the house inspected and you can really know what you're getting, and you can look at the market and really know what that house is worth. But a business is not a tangible like a house, right? A business is completely intangible. It's actually a system. It's a place where capital people operate together in a place to produce a cash flow. And so it's very fragile and you never really understand everything about it before you own it. And so for most buyers it's super scary. And they're like, what if the seller's lying to me? What if things are not going to work out the way I think? What if I'm not going to be able to operate the way I'm told? And so the normal way that people deal with risk is they wanted to press the price, they start to build in all of these what ifs into what they're willing to pay. But there's another way, and the other way is to have the seller finance some portion of this purchase which is subject to offset. So basically what the seller is saying, look, I promise everything I've told you is true. I'm going to finance part of this deal for you. A lot of the times It's a little 10% note. People who work with me push for 30 or 40% notes that are a material amount of money and it's subject to offset in the case of material misrepresentation or undisclosed lien or liability. And so what that means is if the seller tells you he owns the forklift and you buy the business, for example, and then three weeks later some a repo man knocks on the door and says the leasing company is owed money on the forklift, no one's been making the payments. You can say, well I was told that I now own the forklift and apparently I don't. So you can pay the repo man or pay his agent or whatever, whosoever's trying to collect and deduct that amount from what you owe the seller. And that is how you protect yourself from any material misrepresentation or undisclosed liability. And with that kind of protection, the buyer then is able to feel confident in doing the transaction and ultimately the seller ends up getting a higher price. Because there are economies in the world, there are countries where the seller financing just doesn't happen and businesses sell for far less money because buyers will build in every risk conceivable into what they're willing to offer.

That totally makes a lot of sense. Very similarities in the non performing note space where you like deduct it based on state and foreclosure, time frames, any risks that aren't such, like taxes that aren't paid and insurance, there's a lot of similarities with it. So you said that basically when you're working with your clients, they're asking for a 30 to 40% seller carry. So does that mean that they're bringing 60 to 70% cash down or cash getting a chunk?

And bank finance, they'd be using a bank, too, and it's great that you brought that up. So someone could put. Like in an SBA deal, someone could put down 10%. They could borrow 50% of the deal from a lender that's using an SBA loan and then ask a seller to finance 40%. You can put that kind of deal together. When a buyer has a really significant down payment, like 30, 40, or 50%, then oftentimes we'll have sellers that will say, look, I don't want to hold a note behind a bank. I'd rather just do the balance in a note. And the seller, they're really the only ones who can capitalize on that note if there's any kind of default, because they're the only ones who can really run the business. A banker can't run the business. Nobody else really could come in and run that business with the same kind of efficiency that the seller could. They understand the business. And so I've had cases before where buyers have failed and sellers have foreclosed on them, even if they have to come in and start taking up the payments on a bank loan. And with an SBA loan, that's really hard. But sometimes there's conventional lending that happens where someone will use business assets like machinery, equipment, vehicles as collateral for more conventional kind of financing, and a seller will repossess the business and take over the payments on those other notes and take the business back. It's not something that most sellers want to do. In fact, a lot of sellers will be really hesitant to finance on the business because they'll say, what if the buyer doesn't pay me? You know what happens? And what I always point out is that if at the moment of closing, the seller gets the buyer's down payment and all the money furnished by the bank, so the seller's going to walk away with 60 or 70% of the total price. Buyers don't usually fail on day two, right? There's usually some period of time, so the seller could then collect payments for a year or two. And then if trouble arises, the seller has the option, not the obligation of saying, okay, I want to get back into this and try to salvage the situation. They could just say, no, I'm going to abandon what's left of my note and just walk away. But if they did come back in and they simply took over the payments on any debts that the buyer had from other lenders. What does that mean? It means that they get the business back. They've already collected 60, 70 plus percent of the purchase price. And if they can turn the business around, they can potentially sell it again. And so the outcomes potentially for a seller with the seller financing can be incredibly lucrative. People don't typically sell businesses in order to execute this kind of thing. I mean, people sell a business because they want to get out. Something personal is making it so that they don't want to go there every day to run the business. But when I explain it to people like this, they begin to realize, hey, this may not be sort of the risky kind of proposition that I originally thought.

Well, that's the thing too. If a bank is on the hook to take over a business, they don't necessarily want to do that. They're willing many times probably to get creative with the previous owner to come back in, get that operations back up for a period of time too. Correct.

Banks want to be paid. Period. And if, if a bank ends up taking over a business, they just liquidate. They don't really have the ability to try to run an operating business.

Yeah, it's just basically what's the forklift work, what's the furnishings work? Let's sell it and get as much back as we can.

And there's, you know, oh yeah, they'll call an auction here. They'll just wind it up as soon as they can. Now if they can get anything out, like, you know, if there's a landlord involved in stuff like, I mean, the options for the lender could be very limited actually.

Now when you're talking about foreclosure, what's the time frame for the business different than like a foreclose on a piece of property where it can vary like 30 days in Texas to like three years in New York? Or how does it, how long does it take to foreclose? I know, it may vary.

Oh yeah. I mean, that's that question for a lawyer. I've very rarely seen anyone actually go through the whole legal process because usually the buyer is in a bad state. And usually the buyer and seller are still communicating with each other because the buyer is still paying money to the seller. And, and so usually the seller learns that there's a problem in the business. The great thing about a seller note for a buyer is it aligns the interests of the buyer and the seller together. Right. Because the seller really wants their money too. And so as a buyer, if you know that the seller has an interest in your Success, it means that you can then open yourself up to sort of a mentorship or coaching relationship with that seller. And so if things start to go off the rails, the buyer will usually start calling the seller and say, hey, you know, this is happening, this is happening. Has this ever happened to you? And oftentimes that seller is going to want to be helpful because they don't want to jump back in and take over the business. And that's, again, one of the big bonus factors for the buyer in creating this kind of arrangement is that there's this alignment of interest. If you compare that to cash closing. If a seller sold a business for cash and walked away with the money and then the buyer got into some kind of trouble, two years later, the seller really has no interest in being helpful at all. Right? And again, that's one of the things that kind of scares buyers. And a scared buyer is not paying top dollar. For a lot of sellers, I take them through an empathy exercise where I say, think of yourself at this point in your Life. Maybe you're 60 years old or getting close to 70, and you own the business. You own a house. You probably have an RV or a place by the lake. You got a condo down in Florida or whatever. You got retirement accounts. You have all these various assets. And then somebody wants to buy your business. And who is this person? It's a person maybe 25 years younger than you. And they've got some savings, but they're going to take all their savings, all their retirement savings, they're going to refi their house or get a HELOC or something. They're going to hit up all their family and friends for a loan or an investment into this business opportunity. Then they're going to go talk to a banker and try to leverage things up as much as they can. And then they want to borrow from you, Mr. Seller. So this buyer almost always is putting the entirety of their financial life in one basket to make the. And they're going to hand this to you because they want to buy this business and use this business as a vehicle to achieve their own financial and family goals. So the buyer is, in a very scary and from their perspective, risky point of view. The business they will end up with is extremely different from the business that the seller sells. The seller doesn't have 90% leverage. The seller, if they've been successful, have probably paid off their debts long ago. They've got lots of stuff that's paid for. They have this great cash flow coming out of the business. A lot of the times when I work with sellers and I tell them what their business is worth, they'll be like, oh, my God, it should be worth more than that. And then I'll show it from the buyer's perspective. I'll say, well, the buyer's going to put this big loan on, they're going to have this monthly payment, they're going to have this tax bill, they're going to have this capex expense, et cetera, et cetera. And here's what's left. If they give you this price, and for some buyers, for some sellers, rather, it's a bit of a shock because they don't stop and think about it from those terms. They don't have that empathy for the buyer. You have to often paint the picture for them. And so for these buyers, it's really a risky kind of scenario. And anything that the seller can do to give that buyer confidence that this is going to work out, and, you know, I believe in you and I believe in this business, and I believe in the market, that's going to go a long way. And one of the easiest ways to transmit that expression, that faith, is through doing a material seller note.

What do you see as far as the terms on that seller note, number of years or rough interest rates? I know that'll vary based on.

Yeah, that's a great question. It's literally completely open to negotiation. So I've seen them as short as 12 months and as long as 20 years. I've seen them with interest rates that approach what we call what would be considered credit card rates, down to zero. Like, usually it has to do with the size. So if somebody's only doing a 10% seller note, they're probably going to want their money in three or four years at the longest, just because they're going to look at the payment and look at the amount and say, you know, this is not much money. I'd like to be paid fairly quickly. But if someone's doing a 40, 50, 60% seller note, then, you know, it's got to be over 10 years in most cases, because the numbers just won't work if you try to pay them any quicker.

Now, when you mentioned sba, you kind of had a little bit of a wrinkle there. Is it difficult to get an SBA loan? You jump through a lot of hoops from time to time with that, or is it very.

Well, it takes time. I mean, they have their own process and they do a lot of their own due diligence and underwriting and all that. Kind of thing. Here's the big issue I have with SBA is that they make more financing and more leverage available to more people, which sounds great, but, I mean, everyone in your audience is a student of real estate history. Know what happened when more money was made available to more people for bigger amounts for houses? 10 years ago, right? 15 years ago, I should say. And so here's what happens, is that the SBA will make a loan based on the purchase price of a business. Nowhere else in the world will anybody make a loan on the purchase price of a business. Because if a business is successful, there will be a component to that purchase price called goodwill. Let me give you a quick example. Let's say there's a little pizzeria, and the owner works in there full time, and he is able to take 100 grand a year out of that business. And you decide you want to buy that pizzeria, and you both agree that it's worth 2.2 times that total cash flow. So it's worth 220 grand. But if you go into the pizzeria and you add up the value of the oven, the inventory, the furniture, the fit, UPS and decor, all that kind of stuff, let's say that stuff is only worth 75 grand. So now you've got a $220,000 business that only owns $75,000 worth of stuff. The difference between those two numbers is the goodwill. That's the gap. So in Canada, for instance, a bank will lend you a percentage of the 75 grand, not the 220. It's only in the US that the bank will lend you a percentage of the 220. And it's only because Uncle Sam stands behind that loan and guarantees it. Okay, and so what does that do? It means that more leverage is available on businesses. It means that more people can get into it with a smaller down payment. And what that does is expands the pool of buyers. It means that more people can make a play on that pizzeria than would normally be able to. It sounds good, but I can tell you the same business, a business in Upstate New York vs. 1 in Ontario that are in the same industry with the same kind of cash flow, the one in Ontario will sell for 30% less because there's less financing, less leverage available. Okay, so I've been on record saying this, Scott, and I say it kind of tongue in cheek. I don't believe the SBA helps people buy businesses. I believe the SBA helps people sell them. And that's a whole different thing. In exactly the same way that GMAC helps GM dealers sell GM cars.

Right. Totally makes sense.

I tell people, be very careful of getting into a high leverage situation with a business. In the world of apartments, you can have a vacancy, but if you have a 10 unit building, it's highly unlikely you're going to have half the building empty. Right. You also can't really double the revenue of the building in a year either. Right. That's hard to do. In the world of business, you can have a 30% decline in revenue one year for reasons completely outside of the owner's control. You can also have a 50% increase by running the business in a better way. Do it, finding new customers, et cetera. So the variability or the leverage in the operation of a business is much more variable than the operational leverage within owning real estate. Real estate has a lot of financial leverage, business has operational leverage. And so I point out that owning a business. How do I put this? When you invest in real estate, it's kind of like investing with guardrails because if you mismanage it entirely, you can probably sell it and still get 85 or 90% of what you paid for the building. Right. In the world of business, you can mismanagement and it's worth nothing. And you can just completely go off the side of the cliff and so those guardrails aren't there. There's a lot more up and down variability. But you can have. I've seen businesses where I've seen five years of financial statements and revenue will jump up and down 10, 15%, sometimes 20% year after year. And if you look at those five year period, you'll see that it's all within a certain band. And we would call that sort of a flat performing business. But if you apply 90% leverage to that business in the year, it's down 20%. You might not be able to take home a paycheck for yourself if you've got that kind of debt service. And these are some of the traps that first timers fall into or people that don't have a lot of experience, they don't realize just what kind of oscillations can happen that are totally normal in the world of business.

Well, and you have obviously saw that happen a couple of years ago, shutdowns and things. And then you also have a lot of seasonal businesses that are peak during the summers or dead during the winters and stuff like that too to keep in mind, to take into consideration. If you're leveraged, that monthly payment doesn't go away. Every month.

Well, exactly. But you know, you mentioned seasonal businesses. I've done a whole bunch of deals with people who bought seasonal businesses. And the seller financing notes only have payments in the high season.

Hmm.

Because when you're doing a seller finance note, you don't have to conform to your idea of what a loan looks like. You can make the payments a function of business activity if you want. You can make the payments only during certain months when the business is active. All kinds of seasonal businesses I've seen that will go to interest only payments from like December to March. Right. When if it's like a summer touristy business sort of thing. And that just recognizes the variability of the cash flow.

That makes sense now, but it's hard.

To get a bank to do that.

Yeah, exactly. It sure is. They like, they like that, that steady stream of income coming in for sure. Now, based on the example you give, would a business that has on site management that's included in the sale versus it being a solopreneur, have more value?

Yeah, like there's a really big difference there. Right. When we look at publicly traded businesses, like if you look at stocks that are available in the stock market, people will look at the growth factor of that business as part of their analysis of what they think the price should be. And the reason is, is because that Coca Cola, for example, they got a president and a chairman and all the management staff and they have their plan laid out. And when you buy stock in that company, you're buying into that group of people. When you buy a small private company, that leadership often is departing. Even in the case when there may be middle management in place, if usually the owner has got some degree of involvement in there, if not day to day, at least they're supervising the manager, manager on some kind of regular basis or looking at the back end of the sales system or what have you. And so that leader leaves. So we don't usually look at the future. The future gives us a reason to buy a business. But our pricing is usually based on performance that exists there now that is substantiated with several years of results that the first question, what is the cash flow? Is going to help a buyer answer decide what the business is worth. The second question they're going to ask though is will the cash flow continue under my stewardship? And you can see in your example those two different businesses you mentioned are going to have a very different answer to that question. And so if it's a solopreneur kind of thing where one person is the Expert and really does everything, the deal is going to look a lot different than if it's a bigger business with some of those management people in place. So a lot of the times a seller, in the example of that solopreneur business, the seller is going to have to sell themselves in the deal. And so when what it might look like to people on the outside is, oh, Scott has taken on a partner because he intends to retire. Because everyone is told that you have a partner, but really that's a business buyer. But the deal is you're going to work together for three years so that they get to learn everything from you and they get to develop all the same relationships that you have now. Here's the problem is, can your business afford to pay two salaries? So this is why that solopreneur example that you had, like very few people are able to pull off that kind of thing. It's not really a great example of a marketable, sellable business versus even just a corner store if you've got the owner who's there full time and then he's got a bunch of part timers. The nature of what they do and how they do it lends itself much more easily to a transaction because when the buyer says, will this cash flow continue under my stewardship? They're like, can I run a store? Well, I can order stuff, talk to the Coke guy, talk to the bread guy, talk to the milkman, right? And they can see that, they can make it work. But if you're trying to sell a business where there's a lot of like expert knowledge and specific relationships that have to be leveraged. I've got a client who just bought a PR and communications firm and it's one of these cases where the seller has a reputation in the industry and is known in the industry. And a lot of the reason why they have the accounts that they do is because of the seller's fame, prestige, notoriety, like the fact that they're a known commodity. And so this is one of the situations that they're doing is the buyer then comes on not as the buyer, but as a new team member. And so it's going to be a longer term transition where someone is going to have to learn the ropes of the business.

That makes sense, definitely. I mean, that's the intangibles that somebody brings in where they make a pizza or the relationship, how they treat their clients is definitely important in that long term success or the success they've had of that date. When somebody's looking at buying business what are some of the things that they need to look at besides just the financials and cash flow?

Yeah, so you want to look at the market, you want to look at whether this is something that has a good trend behind it. You want to look at what you can add to it. So remember I said the future gives you reasons to buy, but you don't put any value on it. Well, if you can find a business that is a business that is a good, profitable business that you know you can enhance through your own skills and talents, that's the deal. Because you buy it and you pay for what it gives you today, but then you take it to that next level. And I've had countless examples of this over my career where someone will have a business for maybe a few decades and you know, they just get kind of tired and they slow down and they stop being as aggressive as it could be. And maybe they aren't very good at systems and processes and organizing. Maybe they were a technician, they were a tire guy and they opened up a tire shop.

Right.

And so a lot of business buyers tend to be people that come from middle management somewhere bigger companies, the military, government, any of those places. And they've usually had a better income so they could save up some capital, but they usually have some kind of experience with processes and like standard operating procedures and things like this. And that's often exactly what these businesses need, is someone who can come in and better organize it and get things running more smoothly and be able to delegate responsibility instead of just delegating tasks. So many times I'll meet business owners who are real pros at what their business does. And they'll hire people and train them and they'll say, now do this task, now do this task, now do this task. But they're still the central nervous system of the everyday operation. Instead of saying to someone, you are now responsible for the inventory, right? You take care of it, you figure out a way to, to manage it, measure it, place the orders, et cetera. And so because they never delegate responsibility, they can never really get away. And the business can never grow beyond a certain point based on their own capacity. And that's what this new owner is going to bring to the table, is they're going to bring the ability to actually start growing again. You see it everywhere. You drive along somewhere and you see a three bay garage doing auto repair. It could have been the same owner for 30 years. They'd never grown beyond three bays. But there are 15 and 20 bay garages, right? So what's the difference between those two businesses, Systems and marketing, the way they run.

Right, right. With, I mean, how impactful is a lot of times. I'm friends with a guy by the name of Roland Frazier who's got a book out, so I don't get familiar with him. He talks a lot about buying auxiliary businesses that work with your existing clientele base. Is that a good starting point if you're already in business doing something, if you're looking to expand your reach?

Yeah, it's a common strategy. Because the question I just said, how can we improve the business? Well, if you have a pool of customers who already know you and then you can offer them a new service, then you can actually make the business you're about to buy worth even more because of how you can grow and expand it. So that can make a lot of sense to me. Don't pay anyone else for the fact that for the improvement that you're going to make would be my one warning. I've seen people do that before. I've seen people overinvest in a lot of different ways. I knew a real estate guy once and they wanted to get into property maintenance and landscaping because they were spending a lot of money on that service and they bought a franchise and they bought a lot of brand new equipment and they spent a lot of money on this capital gear. And so they made the business work, but they didn't really make any money. And I think if they had been able to study it further, they would have realized probably that there would have been a lot cheaper ways for them to get into that. And at the end of the day, you're buying a cash flow. But one of the exercises that I take people through is I'll say, well, what would it cost you to replicate this? Because if somebody wants just a crazy price that's way too high for their business and you could replicate it by buying everything and then even finance losses for a couple of years. And you're like, wow, I could start this for a lot less money. I mean, that's one of the things that people are going to, are going to consider that people in your audience who happen to own businesses, one of the worst things you can do is bring your business to market and have it overpriced. And the reason is, is because there are qualified buyers out there who are people with money, operational experience, good credit scores, et cetera. They're doing research. If they're looking for a business just like yours, they've discovered my podcast, they've discovered books, they know what the business should be selling for. And if you come on the market for 50% more, they just look at you and go, oh, this person's nuts. They're a waste of my time.

Right?

And you won't meet those qualified buyers. Who you will meet are other people who don't know what they're doing. And so those people will meet you, they'll talk with you, they'll even agree to pay your price. And then they'll go meet the banker and the banker will explain why they can't afford to buy the business. Right? And you'll just spin your wheels and waste time. And confidentiality may be broken at some point. You never want to tell anyone that your business is for sale. If people in the public find out a business is for sale, it can be ruined. And so I always say to people, if you are motivated by a pressing personal need to sell your business, you have to know what you're doing. You have to be prepared. It has to be packaged up properly and has to be priced properly so that when you bring it to market, you get the attention of the qualified buyers who will then come and make you an offer and you can sell the thing and have it move. It's not like selling a piece of art or a fancy house where you can say, I'll bring it to market, then I'll keep reducing the price till it sells. That strategy often backfires a lot of the time. People out there in the business brokerage community will tell you that the buyer that makes the most sense, who's the most qualified buyer, is often one of the first people that a seller will meet. And so it's not a case where you want to, you know, be burning your opportunities.

So you're saying that maybe some of these list, these business listing websites where people have been listing their business for sale. It's kind of like the loop net of commercial deals. If somebody's on LoopNet, it's not necessarily a deal in a lot of cases.

Well, let's talk about those business for sale websites. So everyone knows that if they want to sell their business and they hire a broker, it's going to cost money, just like real estate. So the top five reasons people sell a small business are burnout, boredom and fatigue, divorce, poor health, the need to relocate, and retirement. So only one of those is planned for. The other four just happen to you. And so when one of those things comes up and someone says, I can't run my business anymore, they're then going to say to them, ask themselves. Do I know anyone who might want to run this business or own it? And if they do know someone, they're probably going to go talk to that person. And this is why you see a Ford dealer being sold to another Ford dealer. Those people all know each other and so it's easy. And so if they don't know anyone, that's when they start to think, maybe I need to go to a business broker. The business broker has some buyers. The business broker is incentivized to sell businesses as quickly as possible. You may think that because they're paid a percentage that they're incentivized to pay to find the buyer who will pay the highest price, but that's not necessarily true. If you've read Freakonomics, they have a great example in there from the world of real estate. But so a business broker, they will have a short list of buyers who they know have done deals, who are really keen, serious, interested buyers. So they'll offer that business to those people before they put it on their own website and they'll try to make a deal happen. And if they can't, that's when they'll put it onto those big business for sale websites. And they, a lot of brokers hate to do it because the minute they do, they're going to get a hundred inquiries. Right.

Tire kickers that don't know what they do.

Yeah, there's an ocean of people just waiting for deals. And if it's reasonably priced, within that first batch of buyers will be the buyer. And so they'll put it up for a brief period of time, get a bunch of inquiries, take it down so that they don't lose all their hair, and then they'll finish the deal. And so the ones that end up hanging on there for a long period of time are often the ones that have some kind of problem. Not to say there's no good ones in there, because you can also get a scenario where you have a business that requires a buyer with certain technical expertise and it's in a smaller city and there's just not a lot of buyers that are right for it. And that business could stay on there for a year or two waiting for the right person. I always tell buyers there's two ways to shop. You can shop like you go to a mall and look at what's for display in the window displays, you know, window shopping. And if you window shop, it's easy to get distracted. You start looking at one thing, then another, then another. And the problem with businesses is every time you look at a new business, you have to indoctrinate yourself in a whole new system. You have to learn all the conventions of that industry. I'll give you a quick example. In construction, direct labor is part of the cost of goods sold, and the administrative labor is part of the expenses. But in the restaurant industry, the all the labor might be in the administrative expenses. Right. Different industries have different conventions about how they report things and why. And so you have to dive into each new industry and learn it all from scratch each and every time. It takes a huge amount of effort and time. So that's window shopping. What I prefer is shopping, like grocery store shopping, where you create a list. You're like, this is what I want. Once you've decided that you want a machine shop in upstate New York, you just need the yellow pages. You can find them all.

Right?

Right. And so then you're free to, like, build relationships with business owners. Earlier, I explained that if a business owner doesn't know a potential buyer, then they might go to a broker. But if they've been contacted by someone who says, I'm looking for a business that matches the description of your business, well, now they know someone. Right. So this is the, what they call proprietary search in the world of business buying, where you're out there trying to network, talk to people, meet those owners to try and create your own deal flow from people who may not yet be for sale. And, you know, some of the people that I work with, they'll talk with a lot of these people and nobody wants to sell. And then all of a sudden something happens, one of those top things, and then someone's on the phone saying, hey, we should talk about this.

Makes a lot of sense. This has been fascinating. David, you definitely are a wealth of knowledge. What's the best place for our listeners that want to continue the conversation or talk with you or hire you? What's the best way for folks and our listeners to get. Reach out to you?

Yeah. So if anyone's interested just about business and buying and selling businesses, you head over to my YouTube channel. Just look up David Barnett, Small Business, and I rip the audio feed and put it on a podcast feed. So any of the podcast services will have. But davidcbarnett.com is my blog site and that's the central nervous system system of all of it. So you'll find my contact info and all that kind of stuff there.

Awesome, David, thank you so much for coming on, sharing your valuable expertise and knowledge with us. Appreciate it.

Awesome. Scott. It's been fun. Thanks for having me. No problem.

All right, guys, gals, you heard it straight from the source there. Somebody's got a ton of experience. Obviously express that during the episode. If you're interested in buying the business, own business, definitely check him out. Check out his podcast, check out his YouTube channel, several books. This guy is just a wealth of knowledge and is willing to share that to help you make the right decision versus the wrong buy. So go out, take some action, buddy, and we'll see you at the top.

Sam.