The Business Of Buying And Selling: Navigating The World Of Small Business Transactions With David Barnett

Buying a company isn’t just about the numbers on the balance sheet; it’s about uncovering the hidden gems and potential pitfalls that can make or break a deal. In this episode, three-time best-selling author and entrepreneur David Barnett talks about buying, merging, and acquiring companies. David shares his expertise on the intricate process of acquiring a business, including the tea leaves and surprises that could come along the way. He shares what the ultimate expression of a well-planned business is. Drawing from his personal experience on both sides of the acquisition process, he provides helpful tips for those considering this route. David also touches on the difference between business and real estate, the drive of culture in small businesses, and more. This episode is a must-listen for anyone looking to expand their company through acquisitions. Join us as we explore the art of buying, merging, and acquiring companies.

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THE BUSINESS OF BUYING AND SELLING: NAVIGATING THE WORLD OF SMALL BUSINESS TRANSACTIONS WITH DAVID BARNETT

We can’t thank you enough and we are grateful that you decided to take time out of your important and busy day to spend it with us on the topic we’re about to speak to our guest. Our guest is David Barnett. He is going to talk to us about buying, merging, and acquiring companies. We haven’t had a guest on yet on this important topic. When his name came across my email, I’m like, “Yes. Get this guy on. Finally, somebody could talk about this subject.”

It’s near and dear to my heart because I got to participate in a couple of these one-on-one sides being acquired, as well as on the other side of acquiring in my corporate entrepreneurial and corporate career. It’s very fascinating to watch the true process in things that come into play that you don’t necessarily think come into play. At least I was shocked at times in my first one where we acquired some of the things or tea leaves to get uncovered looking around at a business. I was quite surprised. It makes sense to me now but at the time, you are a virgin in the process and had no idea these were important things when it comes to buying the business.

Before I bring him in, let me read you some of David’s bio. I’m not going to read all of it because I want him to fill in the remaining pieces that he feels are important in the first question. David has been working with small and medium-sized businesses for many years. He’s a three-time bestselling author and has written eight books. He likes to shed light on the complex and sometimes tricky process of buying, selling, and managing small and medium-sized businesses.

After a career in advertising sales, he started several businesses including a commercial debt brokerage, helping to finance small and medium-sized businesses led to the field of business brokerage. With that being said, David, welcome to the show. Thank you so much for taking time out of your busy day. David is a Canadian up in New Brunswick.

Andy, thanks for having me.

We very much like stories on this show. It allows our audience to connect with our guests and so forth. Everybody read the bio piece, but what would you like to fill in about your entrepreneurial journey? What drove you to be an entrepreneur? What were the moment and the process? What got you started?

It was an evolution. Do you ever have one of those conversations about nature versus nurture? Do you know how a person ends up being the way they are? When I was growing up, my mom was a stay-at-home mom, and my dad was an engineer that worked for a Federal government department. There was not a whole lot of entrepreneurialism going on in the house, but I was always looking for ways to hustle and make money. I was cleaning snow as a teenager, delivering flyers, and getting my hands into every kind of business. By the time I was in high school, I knew I was interested in business. I should have opened by saying I’m adopted.

When I got into my twenties, when I was well into my entrepreneurial career, I made contact with the paternal side of my biological family. Do you want to know something funny? All of them are entrepreneurs, home builders, auto repair business owners, and developers. A whole lot of them are business owners. I found that very interesting. I was interested in business from the time I was a child and decided to go to business school because I thought that’s how you became a businessman.

Only later to realize that what they do there is not business. They turn you into what I affectionately call a Fortune 500 bureaucrat, where they teach you how to be a middle manager in a big organization. You spend your time doing case studies on whether general electric should enter this new international market or something. My heart and interest were always in the local businesses that you see when you drive down the main boulevard of any town.

I was fortunate when I got out of university to end up working for the Yellow Pages. I was an account rep. My job was to go and visit the owners and managers of these very businesses that I was interested in, sit and talk with them and figure out how they made money, what kind of customers they were trying to attract to try to serve them, and find those customers.

This would have been the early 2000s. The internet being what it was and how it was developing, I realized Yellow Pages was probably going the way of the dinosaur at some point. I left, got into the business, and became a finance broker. The big financial crisis of ‘08 and ‘09 is what ended that career because I was using a lot of these B-category lenders to help businesses get capital, either loans, lines of credit, or operating leases on equipment, for example. This subprime crisis took all those guys down with it.

It was at that time that I noticed all these people that were trying to do these businesses buy-sell deals with Main Street businesses. I didn’t know how to be a business broker but I knew from my experience in education and business that these people I was running into didn’t know how to be a business broker either because they weren’t putting the deals together very well and some pretty bad things were happening. People were losing deposits and buying businesses with no consideration for operating capital. All kinds of bad stuff were happening. I thought, “This is a market that needs to be served. My brokerage business is not doing very well.”

I decided to get into it. I joined up with a big international business brokerage franchise because they gave me access to training. I ended up down in Atlanta for a part of that training. Atlanta, Orlando, and Ottawa. I spent a week in those three cities each doing training and became certified to help people buy and sell businesses. I did that for three years.

It was exciting because being a business broker is trying to foresee the solution to a puzzle without knowing who the other party is and you have to dovetail into this deal. Once you meet the buyer, you have to figure out what kind of deal will work for both people and then try to guide the two parties through their negotiation to an outcome that might be palatable to both people. You have to demonstrate that it should also be palatable to their attorneys, accountants, and any other advisors they might have, their partners, or spouses.

Being a business broker is like trying to foresee the solution to a puzzle without knowing who the other party is.

It’s complicated. It takes a long time. There were several deals I worked on for years and you only get paid at the end. What I’ll say about a business brokerage is that it’s very interesting. It’s a terrible business to be in, especially if you have two young children and you’re trying to run a household. It’s the ultimate roller coaster cashflow kind of business. I did that for 3 years, sold 36 companies, and thought, “This is nuts. I can’t even make a household budget because the cashflow is so inconsistent.” I left and became a banker.

Four years later, everyone kept calling me on my phone looking for help with these deals that they were doing. One day the bank decided to reorganize and they were offering packages. I took that opportunity to create a new kind of business. I still help people buy and sell businesses but I operate as a consultant and not as a broker. It’s a very different kind of value proposition that I bring to people. I use the business model of attorneys. I break down the process into multiple stages and say to people, “Here’s the menu. Do you want my help with these parts? This is what I charge.” The big difference for me is that I’m billing people every week for the help that I give them. I don’t have that cashflow rollercoaster.

The advantage for my clients is that they can get access to my help for a lot less than it would ultimately end up costing if they were using a broker and completed a deal and paid a commission. One of the downsides to the whole business brokerage model is that because only the successful transactions end up getting paid for, effectively what happens is people who have successful, profitable businesses that are desirable end up subsidizing the broker’s time spent with businesses that have a hard time selling because a lot of brokers will spend time on deals that never get completed.

Buying And Selling Companies: One of the downsides to the whole business brokerage model is that only successful transactions end up getting paid for.

How do they live? How do they make it? They make it because of the commissions they earn on successful businesses. It’s an interesting thing that I never considered until I was in the business and I realized, “The people with the winning businesses are footing the bill for all this other stuff I’m doing at the end of the day.”

Would you say there’s some similarity to the real estate market?

The business evolved by copying what happens in real estate. In certain places, it’s trying to evolve beyond that. Before the 1970s, small businesses didn’t get bought or sold. They were handed down or would close and liquidated. The concept of, “I’m going to find a buyer for my successful business and train them how to operate it,” holds some kind of value beyond the stuff that it owns. A lot of this has evolved in the last several years.

If I wanted to go buy a diamond, the typical thing that people are going to look at is the 3 Cs: Cut, Clarity, and Color. Cut is the shape of the diamond and how the edges or surfaces are created. Clarity is the brilliance of it and the color, whether it’s got some yellow in it or it’s pure white or whatever from that perspective. That’s been the standard that’s been created for measuring the value of a diamond. Using that as an intro analogy, what typically does a company look at in terms of its value? What are the measurements, like cut, clarity, and color for a diamond, typically for a business?

The very first question is, “What is the cashflow?” That is what the buyer is buying. They’re acquiring a cashflow. With the cashflow leading to the value, we are typically looking at historical performance. In the world of big businesses like publicly traded companies, they tend to look at the future. Here’s a big difference.

If you’re going to buy stock in Coca-Cola, the current management leadership and all those people are going to be there before and after you make the purchase of those shares. When we were talking about a small Main Street business, all of the brain trust of leadership departs when you buy it and you have to replace it with yourself. We don’t typically look at the future. We look at what you’re getting and what’s been proven.

The cashflow determines the price and then the next two questions are important because the next question is, “Will the cashflow continue under my stewardship?” This is the question that the buyer has to ask. Sometimes when we get small businesses where the owner has some kind of technical skill, the owned business can only be sold to a maybe younger person with the same or similar kind of technical skill because they’re going to be able to answer that second question with, “Yes. I’ll be able to carry on.”

The third question is, “Do I want the hassle of trying to run it?” “What is the cashflow? Will the cashflow continue? Is it going to be horrendously difficult for me to take the reins of this thing?” If the answer to the second question is, “No, it won’t continue,” then that person isn’t going to buy it. They’re going to back away from the deal. If the answer to number three is, “It isn’t going to be difficult for me to take the reins,” that can be addressed by business owners by creating proper systems and processes within the business.

When I do presentations to business owners, I put a picture of a Monopoly board game up on the screen. I say, “What would happen if you bought this product and it didn’t come with an instruction book? It would be difficult to figure out how we make this work and what we are supposed to do.” You might meet someone that had played it before who could give you some pointers but we couldn’t rely on everything they said. The instructions are what is important.

A way that business owners can deal with that last concern about how difficult will it be to run is to get themselves organized. What will typically happen if people don’t feel comfortable with that question about cashflow continuing or the operational tools that are in the business is they may still decide to make an offer. It’s either the price or the terms are not going to be as palatable to the seller.

That’s another big thing when it comes to business. You were involved in a business acquisition and they did a very exhaustive examination. We call that due diligence. In the world of very small businesses, I call them Main Street businesses. Typically, with the cashflow of the owner under $500,000, it is very expensive and difficult to do thorough due diligence.

Big companies will do it because they’re talking about millions of dollars so spending hundreds of thousands of dollars doing due diligence makes sense. In the world that I operate in, if you start to have to spend five figures with attorneys, accountants and different people, it can make the deal uneconomical. The way we deal with a lot of these problems is through the deal structure by taking things that the seller says at face value but then we make the seller finance part of the transaction and make that seller financing subject to offset. In this case, there’s been some misrepresentation in any of these declarations or information.

It’s a cheaper workaround. It is designed to incentivize the seller to have an aligned interest with the buyer because the only way the seller is going to see all their money is if the buyer is successful. It creates a relationship where the seller is incentivized to be helpful, teach the buyer as much as possible, and act as a coach and mentor to the buyer. When these deals are set up successfully, buyers and sellers usually end up becoming friends because they spend a lot of time together.

From the seller’s perspective, they’re not going to choose to lend anyone money to buy their business. They want to be confident that the person they select is going to be qualified, be able to do it, and run the business successfully. Having a seller that agrees to this kind of arrangement is a huge vote of confidence for the buyer.

Buying And Selling Companies: From the seller’s perspective, they’re not going to choose to lend anyone money to buy their business. They want to be confident that the person they select is going to be qualified.

The acquisition that I was involved in was a corporation buying a small business owned by two gentlemen. They contracted those two gentlemen to stick around for a year running the business and developing a management team that could take over once that one-year period was over to help ensure take that risk away from the deal. They didn’t have anybody in the company that had the background of what we did. We ancillary on the side but not directly. That’s how they were able to structure the deal to minimize risk.

That type of arrangement happens in a lot of cases where maybe some of the systems and processes aren’t properly set up. You may not have been privy to all the details of the deal but usually deals like that involve significant holdbacks against certain mild posts being reached. The seller wouldn’t get all their money until a whole list of things had been achieved.

I don’t know the details but they had some mileposts in that twelve-month period they had to be reached before another cash outlay would be given to them.

What I say to a lot of business owners is, “If you plan out your exit plan, think about what it’s going to be like to sell your business, and realize what kinds of things a buyer is going to demand, you can start to implement those things sooner.” When you start to create things like operating procedures and properly defined job descriptions, org charts, and all of this kind of thing, what you end up with, in addition to being better prepared to sell the business, is you often end up with a business that’s easier to run and manage. You can often uncover problems in the business and make your business better and more profitable. The real meat of business ownership for small businesses is not in the exit.

We all hear these stories of people in Silicon Valley like Mark Zuckerberg or whoever is going to sell their business for billions of dollars. In the world of small business, we’re talking about an asset that is so risky and the multiples that these things trade out are quite low. The real meat of ownership of being in business is in ownership and operation. You want to be as profitable as soon as you can and then take chips off the table. Have earnings that you can remove from the company to build other wealth elsewhere.

If you sell, that should be seen as a bonus because a lot of the time, small businesses, given their risk profile, something happens and they end up closing. Business owners are against the idea of, “My business is valuable. I’m going to sell it and that will be my retirement package.” The statistics are scary. Eighty percent of businesses listed on platforms online in these big business-for-sale websites don’t sell. You have to think about what it is you do, who a potential buyer might be, and what the deal might look like for them. Can I give you a quick example of an exercise I went through with someone?

Please do.

It was a small-town food business. It was a little restaurant and they had a prime location, especially for tourist season. They were right by the fisherman’s docks. All the people come walking along the water and love to stop in there. They take advantage of this prime location for the summer tourist season. They make a lot of money in the winter. They can close up for a couple of months. It’s a nice business in that respect. They had this idea that their business is worth a lot of money. I asked them a few questions. I said, “What do you do all day?” They work in the business, husband and wife team. He’s in the back. She’s in the front. They have other employees that join them during the busy time but they’re in there doing work.

I said, “Who is the ideal person to take over for you?” They didn’t hesitate. They said, “It’s someone with some degree of experience in the food service or hospitality industry.” I said, “What you’re telling me is somebody who today is working in a kitchen somewhere or maybe they’re a waiter or a bartender, that person is going to be the ideal buyer for your business.” They said, “Yes.” I said, “The thing about hospitality is that these people often work for rather low wages. When that person is ready to make a move, get out of their job and buy a business, we can’t expect that they’re going to have a large down payment.”

I was painting the picture of what this person was going to look like. No big company or chain was going to come and buy their restaurant. It was going to be another person like them. It was probably going to be a person who saved for 1 decade to get $10,000 or $20,000 together. It’s in the food service industry so banks don’t particularly like that kind of industry. It’s very difficult to get financing.

I was explaining to them, “In all likelihood, the person who buys your business who is going to have a very small down payment is not going to qualify for a mortgage to buy the building so how can we make this affordable for them? You’re going to have to take their down payment and receive other payments from them over time for the balance of whatever you sell the business for. You can’t expect that they’re going to be able to get to the building at the same time. You’re going to have to become their landlord.”

It can be a nice semi-retirement exit for you because you can get some money, get these payments over time, become a landlord, and get some passive income that way. Once this new operator has 2 or 3 years of financial statements under their belt or their operation of the business, then they should be able to go, get a mortgage at the bank and buy the building from you. I’m painting this picture of a process that could take 4 or 5 years. In the book, E-Myth by Michael Gerber, he describes them as a technician rather than an entrepreneur. A lot of these people are working in their business and are experts at what their business does but they’re not an expert at this.

You alluded to business brokers being real estate agents. Businesses and real estate are nothing alike. Buildings are tangible solid objects. Businesses have receivables, employees’ payables and inventory. Most small business owners who’ve never partied in a transaction, in their mind, liken it to something like selling a house. They think it’s going to be similar that they’re going to find someone who likes the business.

Businesses and real estate are nothing alike. Buildings are tangible, solid objects. Businesses have receivables, employees’ payables, and inventory.

That person’s going to go off, have meetings somewhere with a bank, show up then at maybe at an escrow company or an attorney’s office with a big check and that you’re going to get the check and go away, then you’ve sold the business. It’s not like that at all. In the world of small and lower-middle market businesses, these things take time. They work much better if you’re properly prepared. If you foresee what you’re going to be going into, you can have your expectations set in a much better way.

One of the most tragic experiences that I see for business owners is that they will list their business for sale or advertise it for sale on one of these online websites. They’ll spend years looking for the buyer. They’ll meet different people who might make different offers and they reject them all or people can’t get financing. They’ll then go online and start asking questions like, “What is going on? Why can’t I sell this business?” They might stumble across my YouTube channel. They’ll reach out to me and I’ll say, “Send me your information. I want to see what a buyer sees.”

I’ll meet with them and say, “These are the reasons why your business is probably worth about $300,000 but you’re asking $500,000. You’re asking too much. At $300,000, that’s not even a cash price. Here’s the likely scenario that you’re going to exit your business with. Here’s a reasonable offer. Someone might give you half down and half over a period of a couple of years or maybe if they can get an SBA loan, you’re going to get 70% or 80% on closing day. You’re still going to have to hold some paper. They’re going to have to have a certain down payment.”

I’ve heard this from more than one seller when I’ve gone through this exercise where they say, “I met someone a year ago who made me an offer like that.” It was a reasonable offer for them to exit the business but the problem was they didn’t recognize it as a reasonable offer because their expectations had not been properly set. They didn’t know what they were going to be getting from the market. To me, that’s tragic because when people do finally put their businesses up on the market, it’s usually because of 1 of 5 common reasons.

I lump burnout, boredom and fatigue into one group. Then there’s divorce, poor health, the need to relocate and retirement. Of those five reasons, only retirement of them is planned for. The other four reasons are things that happen just because of things in life. Oftentimes, people have no interest in selling the business. They’re operating it and then one of these things happens. The spouse becomes ill. You become ill. All of a sudden, you realize you’ve got no more enthusiasm for the business. You don’t want to manage it anymore or deal with the employees anymore. You then decide to put the business up for sale. You have to scramble to gather the information to get everything ready.

If you can get out there and have a reasonable asking price and expectation of what’s going to happen, you can sell a business fairly quickly. For these guys who get stuck for two years trying to sell with that personal thing hanging over them the whole time, eventually, a lot of the times when the people get into these situations, they end up closing. It is a tragedy because people lose their jobs and there’s value there in a lot of these businesses that never get to be realized.

You’re going down the road answering a question I had for you coming into the interview. Let me take it a step further. I start a business in my twenties. I consider it a family business. I build it up through the years. I have children. Fingers crossed, the goal of the game plan is to hand the business over to a child to continue it when I feel like my body can’t handle it anymore, I’m ready to go have some fun on vacation with a wife or whatever kinds of things. That particular mindset as you’re building the business doesn’t necessarily take into account everything that you listed. Divorce, health or things that come out of the blue that we didn’t take into account are not part of our mindset or vision for the business.

Is it important if somebody does have that goal, that they want to keep it a family business and hand it off to the kids down the road? They should still build a business in such a way or have it in their mind like, “That’s my goal but life happens.” I may get stuck in a position where I don’t even get to that point because something happened in life and I’ve got to bail out. It’s important to keep these things in mind that handing over to the kids is truly a celebration because you made it but I’ve built the business in such a way that if something out of left field comes, I can yank the cord and still get something out of the business, even though I wasn’t required per se to do that because of what my end goal was.

Let’s hone in on the word business. A lot of people don’t set out to build a business. What they set out to do is acquire an income or build a lifestyle, which is different than building a business. They end up creating a job for themselves, which provides for themselves and their family. A lot of people make a business plan, work and hustle hard and all of a sudden, they get to the point where they’re earning the money they need to have that satisfactory living. They’re earning $100,000 or whatever the number that they need where they live and then often the planning, plotting and business plan all stop.

They just drive that car and keep going until something happens then they think, “Can I sell this to someone?” The real difference is if you are setting out to build a business and you’re thinking about the organization, the structure, how things will be done, how the customers will be served and who’s going to serve them. As you grow that, you can work yourself out of the day-to-day. The ultimate expression of a well-planned business does not need to be sold because you can retire while other people continue to run it. You can still own the thing without working on it. A business like that can be handed on to the next generation, whether or not the kids want to be involved in the day-to-day.

The ultimate expression of a well-planned business is one that doesn’t need to be sold, because you can retire while other people continue to run it. You can still own the thing without working on it.

Small businesses sell are rather low multiples. That is because of all the risks involved in this kind of asset. There are ways to transfer ownership of a small business that remove the risk for the buyer. I’ll give you an example. You know that you want to retire from your business. Let’s say, you do work in it and you thought your children might want it but they don’t. What are you going to do? You find someone who you think might be a good person to run the business and you allow them to become a small minority partner. The two of you are running this business.

The older partner has all the experience, wisdom, expertise and knowledge. The newer person brings ambition, energy and all that kind of stuff. You can then start to grow the business even more. Over the next couple of years, what happens is as you have distributions from the business, both partners get it according to how many shares they own or the percentage of ownership. The smaller partner keeps using their distributions to buy more shares from the more senior person but the business is becoming more valuable as time goes on.

The senior person sells their first shares for a little bit of money but then by the time they sell their last shares 5, 6 or 10 years later, they’re worth considerably more. It’s a good deal for the person who’s buying because they never have to assume everything all at once and hope that it’s going to work for them. They have a plan that provides for how their acquisition will be financed through their dividends or distributions for example.

That person can grow into becoming the owner while the old owner exits but that takes planning, forethought and desire to go out and find the correct person. There are a lot of elements that have to be put into place. I always say that a plan that you can follow where you have control over the timeliness and different elements can sometimes be a lot better than a plan where you rely on a lot of unknown factors. If someone says, “I’m going to put the business up for sale and sell it to a stranger I don’t know,” you’re gambling that there’s going to be a buyer out there that is a right fit for your business and that they can be found in your area at the right time and qualify for credit.

When I talk about strategies like, “Let’s be open to financing more. Let’s think about the buyer. What kind of down payment do they have,” what I’m trying to do is I’m trying to open or broaden the pool of prospective buyers. If you’re a dentist and you have a small practice and you can only sell it to another dentist, then you have a very small pool of potential buyers.

If you are a roofer and you’ve got no systems processes, no methods for doing estimates and no ways to manage your crews, you can only sell your business to another person that understands roofing. If you implement all of those systems and give yourself the tools, the formulas for estimating and the organizing methods, you start using software that organizes and schedules your jobs and all this kind of stuff, you can sell it to a guy that wants to get out of the post office because you can teach them how to use all the tools that you’ve created. It broadens the pool of potential buyers.

One of the biggest roadblocks or speed bumps is when businesses own real estate. The seller will often take the attitude of, “I want to sell the whole thing, lock, stock and barrel.” What they do when they take that position is they say, “I need a buyer who’s got enough money for a down payment on the business and the building.” We’re talking about someone who maybe has 2 or 3 times the cash for the down payment versus someone who is going to buy the business.

You shrink the pool of potential buyers. The more money that a person has, the more power they have as a buyer. People with a lot of money know that they wield a big stick. Though they have more negotiating power when they come in to look at buying a business, you want to try to solve the problem of how a buyer will buy the business. Think of a car dealer. If there was no such thing as a car loan or a car lease, how many $40,000 cars would be sold? Not very many.

The more money a person has, the more power they have as a buyer.

The car dealer understands this. This is why when you go into the car dealership, they’ve got all the different finance and leasing programs lined up there for you. They know that if you’re eager to buy, they want to make it as easy as possible. They want to smooth everything out for you. They can sign a few documents and drive away.

That’s the kind of attitude you want to take when it comes to selling your business. You want to figure out, “How is this person likely going to buy my business? How can I make it easier? How can I demonstrate my success and results so that they can, in turn, go and demonstrate these things to a banker who might make a loan?” For example, you want to take the attitude that a car dealer has like, “How can I make it easier for someone to buy this big expensive thing I have called a business?”

You made a statement, “Buying a business is not real estate. Real estate is an asset kind of thing.” What kept coming to my mind as you were talking was if I owned a home and I’m thinking about putting on an addition or making changes to the home and so forth, I can do it 1 or 2 ways. I can go out and go, “This is what I like. This is what I’m going to do. I don’t care what anybody else thinks.” Not take into consideration that you might have to sell that asset one day. That’s a possible choice. Another choice could be, I got a buddy who’s a real estate agent. I pick up the phone and say, “Can you come over? I’m thinking about doing some changes to my home. I’d love to get your opinion from a real estate agent’s perspective. What is this going to do to my home when it comes time to sell it?”

Your buddy comes over and says, “That’ll be okay. You’ll get some return on your investment for that or your money back for that particular. No, that’s a cosmetic thing. It won’t affect the value of your home. You’re going to pour $3,000 and not going to get a penny back out of that because there’s no value from a buyer’s perspective.” If you’re in a business, it wouldn’t hurt to call somebody up like yourself, even though you have no plans to sell the business at the moment but have that conversation saying, “Here’s my business. Here’s what my cashflow looks like. I want it to be valuable and attractive down the road. Should I ever need that point, what should I be doing in terms of changes to make it more valuable?”

I’ll bring up two points about that. If you’re going to acquire something like if you need to add another truck to your business, for example, you can get financing on a truck or maybe you can lease a truck. Stop and think, “What if I was to sell the business next year?” You ask the question when you’re talking with the finance person, “If I sold my business, could this lease be assumed by somebody?” If they can assume the payments on the lease, that’s the same as handing you the balance because if they gave you the money, you’d end up paying the leasing company. You can ask the question, “Is this lease consumable?” You’re building a solution into your business that a buyer could take advantage of to help acquire the business. That’s the first thing.

The second thing is I’ll sometimes run into business owners who will say, “I replaced these pieces of equipment so my business is worth more.” This is the tricky thing. The value of a business is based on its cashflow. People are paying to buy a cashflow. It’s simply assumed that everything required to make the cashflow operate is included in the price to buy the cashflow. It doesn’t matter if your equipment is new or not. Someone might like that about your business and see it as a positive attribute but it doesn’t make the cashflow more valuable.

On the flip side of that, if you’ve been planning to sell for ten years and have been deferring all maintenance and not replacing anything and someone comes in and sees that everything is being held together with duct tape, entwine and about to fall apart, then what the buyer’s going to say is, “To make this cashflow carry on into the future, I’m going to have to pay you and buy a bunch of other new gear.”

What they’re going to do is they’re going to rightly say, “If I have to pay the equipment dealer for a bunch of stuff, then I can’t pay you as much because what I’m buying is cashflow. All the money I have to lay out, whether it’s to equipment dealers or the seller of the business is the investment I’m making in the cashflow.” You should be operating things per usual, doing capital expenditures, replacing things and keeping things properly maintained.

It all comes down to the cashflow. If you’re going to do something new in your business, the advice that you would ask your real estate agent about is, “What will this do to the value of my home?” The question I would ask is, “What’s it going to do to your cashflow? Is this going to allow you to serve more customers, reduce your cost of serving customers or create a stronger contractual bond with your customers? I want to know that any money that you’re spending in the business is going to be to improve the business.”

This is one of those things that gets at lifestyle versus business. I have seen many business owners get into the trap of wanting to enjoy the bounty of their business within the confines of their business so that they don’t have that tax event of taking money out. One thing about paying taxes is that there is no more uncertainty of a sign that you are doing well in making money than if you have a tax bill. Many people out there manage their businesses in a way to minimize taxes. They’ll put personal expenses in their business. Maybe they won’t declare some cash sales or something like that.

Look at your tax rate. If you’re pocketing a dollar because you think it helps you save $0.32, what that’s going to do is it’s going to make it more difficult for a buyer to get financing for your business, which means you’re going to end up holding more paper on the deal if you can convince a buyer that the profit is there.

If you can’t convince a buyer that the profit is there, then that dollar you pocketed in addition to saving you $0.35 from Uncle Sam cost you maybe $2.53 from the buyer, which is 10 times more than what you think you saved from the tax man. That’s one of the big things that I run into all the time. People are playing these games to try to maximize their gains and tax bills. What they do is end up creating a real problem as far as conveying value and demonstrating results to potential buyer and their bankers.

Let’s take a moment and step away from assets and cashflow. This question is probably more geared toward somebody who’s buying a large, small or medium company with a number of employees. How much should a buyer take a look at the intangibles like when they’re looking to acquire a company? In your mind, from what you’ve seen through all the companies you’ve helped sell, how important are the intangibles in the purchases?

They’re very important and becoming more so. You can put them into different categories like customers. When we look at customers, we look at things like customer concentration. Are there a couple of big customers, for example? There are employees and employees are becoming increasingly difficult to find. The inflation has been running pretty high for the last couple of years. I’ve had many people look at businesses where they haven’t been any wage increases.

When we look at the business, one of the things that are going to have to be done immediately almost is for the wages of the employees to be increased. That is going to have an impact on the cashflow. It is important. Oftentimes, if you’re a buyer in a particular industry and you’re trying to grow through acquisition, you can run into an issue of having to readdress all of the compensation in both companies if there’s some significant mismatch because if you acquire the company and the people are better paid in the company you’re acquiring, then eventually your original employees are going to discover that. It’s going to have to be addressed. There are a lot of those kinds of considerations.

In the world of small business, culture is typically driven by the owner. The owner is often the captain of the ship and the leader of the business. They set the tone. I’m a big fan of processes and systems, well-laid out responsibilities, tasks and things like that so that people don’t become paralyzed at the prospect of having a turnover. I once had a meeting between a restaurant owner and a prospective buyer. The buyer asked the seller, “How do you know the employees are going to stick around because I’ve never owned a restaurant? I’m going to be relying on those people to help me manage this.”

Buying And Selling Companies: In the world of small business, culture is typically driven by the owner, as they are the captain of the ship and the leaders in the business.

The seller looked at him and said, “It’s a restaurant. Within a year, they’ll almost all be gone. That’s why I’ve developed this particular process that helps me identify people and train them more quickly and get them up to speed more quickly.” He explained how he deals with the issue of owning a business in a high-turnover industry. That explanation of this system is what gave the buyer the confidence to move forward because he realized, “I can’t be afraid that employees will leave because they always do.” Nobody can stay in a position forever and sometimes it’s unforeseen.

Employees can be very loyal, dedicated and helpful, want to stay with the company forever and get sick. It’s something that everyone’s going to have to deal with. I’ve run into many situations where people have done acquisitions and there’s been a mismatch between the style of leadership that the new owner has and the employees that are in the business. In some of those cases, over a couple of years, the entire staff ends up turning over. These are some of the reasons why small businesses are risky asset classes.

We can look at the events of ex-employer Boeing over the whole corporate culture thing, going back to their merger between McDonnell Douglas and Boeing. It’s a different kind of acquisition because it was a merger but corporate culture played itself out through the years to be where Boeing is now.

Was it a competition? Was it like one culture against another?

Boeing was here in excellence in quality. It was the driver of the culture. I won’t say backseat but we’re 2nd or 3rd in line behind that. Whereas at McDonnell Douglas, it was all about the bottom line. It was more of the Jack Welch of GE mentality that won out. We saw suffering and equality of product because of it over the years. Two questions to finish this out. The first one is what is one thing in the first 100 days that somebody buying a company should be wary of after the acquisition to help it along and make it a successful transition?

In the first 100 days, you shouldn’t be trying to change anything. You should be looking for anything that may be out of place vis-a-vis what you were told by the seller about the business. If there is a problem with what you were told, what we would call a material misrepresentation, you want to know as soon as possible that that thing exists. The first 100 days are also one of absorption learning. You’ve got access to the seller usually during a transition period initially.

You want to make sure that you’re recording, making notes, and documenting everything that you can about the business. I’m a big fan of transition programs where the seller spends some amount of time upfront but then is recallable over the course of a year. As you settle in and learn things and once-in-a-while situations pop up, you can then go back, address those with the seller and get their feedback, advice on them, and things like that.

We greatly appreciate you coming on to the show and sharing your wisdom. Oftentimes this subject gets a backseat to a lot of other things about business running the business and people don’t pay enough attention to this same call on the merger and acquisition and the possibility that you might have to sell it or offload it per se down the road because of a live situation. It’s an important topic. Here on the show, we ask all of our guests the same question to end the episode. It has a lot to do with the title of the show. There’s no right or wrong answer. It’s about what’s in your heart. What do the words “generate your value” mean to you?

To me, generating my value means accomplishing the mission that I’ve set for myself in business, which is simply to help people avoid bad deals, both buyers and sellers because a bad deal for a seller often means that they’re not doing a deal. That means wasting time in their life. A bad deal for a buyer is the same thing. It usually means that they’ve ended up overpaying. The only way to work themselves out of that problem is by spending years of their life working out the issue. Time is money. We spend our time earning money. When something happens that causes us to lose money in an unfair or unjust way, what someone has done is they’ve come and taken part of our life. That’s what drives me to help people avoid bad deals.

Buying And Selling Companies: Generating our value means accomplishing the mission that we’ve set for ourselves.

We can’t thank you enough once again for coming on and sharing your wisdom. If somebody was interested in your services or doing the same thing you’re doing or something of that nature, what’s the best way they could reach out and get ahold of you?

The best thing is to come to my blog site, DavidCBarnett.com. From there, there are links to all the other places I’m online. I’ve got a YouTube channel with 500 videos. I’ve got some books and online courses and I do consulting work with people. I’ve got an email list that you can sign up for. That would be the place to go.

For our readers, hopefully, they got some golden nuggets out of our conversation that they can integrate into their lives or businesses and that they might generate value either for themselves or others through the process of listening and taking their time to join us in this conversation. If you found this to be helpful, please share it. The value doesn’t get created unless you share it. It lands in other people’s lives. It lands in their lap and they have an opportunity to listen to it as well. This is when that value gets created to a multitude in the world. I can’t encourage you enough to share this episode.

To those who feel like they would get some value out of it, help us move it along from that perspective. Join us again for another episode where we have another great guest like David that joins us to share their wisdom to help generate value in your life in some particular subject or area. I can’t encourage you enough to hit that follow button here on the show so that people can follow us on our journey to generate value in people’s lives. With that being said, have a great day. We’ll see you next time. Take care.

IMPORTANT LINKS

ABOUT DAVID BARNETT

GYV 28 | Buying And Selling Companies

Do your listeners love to learn about how businesses are bought and sold? Or maybe they are considering to buy a business but do not know where to start. Or maybe they are considering to sell their business at some point in the future.

3-time best-selling author and entrepreneur David C Barnett sheds light on the complex and sometimes tricky process of buying, selling, and managing small & medium sized businesses.

After a career in advertising sales, he started several businesses including a commercial debt brokerage. Helping to finance small and medium sized businesses led to the field of business brokerage. He now works with entrepreneurs around the world who are buying or selling a business as a private transaction consultant.

As a former business broker and author of eight books including How to Sell My Own Business, David knows firsthand how important it is that you build, structure, and manage a business in a way that will allow you to eventually sell it—even if that is not your plan A.

He can help your listeners understand how businesses are valued, the most common reasons why business owners sell, the types of terms that can be negotiated when buying or selling a business, a report on buying in a recession and COVID 19 distressed businesses, and why most businesses sell for less than you would think.

David has been working with small and medium sized businesses for over 20 years. He has helped entrepreneurs buy and sell them. He has helped them grow. He has helped people finance them.

He is the host of a YouTube channel with hundreds of videos about buying, selling, financing and managing small and medium sized businesses and can be found anytime at his blog site www.DavidCBarnett.com.

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