Finding the Right Small Business.

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Welcome everyone. We have a very exciting show for you. Today. We are going to cover the three phases of entrepreneurship. My name is Giuseppe Grammatic, host of the franchise Freedom podcast, and I wanted to introduce our guests and my good friends, glad to be here. This is Henry Lopez, and I’m the host of the how a business podcast and an entrepreneur. Hey, I’m David Barnett, and I’ve been talking about buying and selling small and medium sized businesses now for over 11 years on YouTube. I’ve got a bunch of books that I’ve written, and I work with people every day, helping them to analyze deals and hopefully avoiding mistakes. I’m Rocky. Lalvani, host of the profit Answer Man podcast, we work with seven and eight figure business owners, helping them to scale and grow their profit and cash flow. I’ll start things off with finding a business. Right before we even dive into exit strategy and coaching and all that great stuff, we have to find the business. So, you know, the big thing here is, you know, what is one thing you think about when looking for a business? Should you build a business from scratch? Should you buy an existing business or a resale or look into franchising. So David, if you wanted to kick things off there with what are your thoughts there? Yeah, I think the first place you need to open a business is between your ears, because it’s all about self image. People will ask me for advice about buying a business, because that’s what I talk about on YouTube and stuff, and they’ll get very hung up on this idea that they need to find this, you know, business that checks all the boxes for them, and they have to, you know, make sure that they are doing a deal correctly, which, which is all absolutely true. One of the things that I find people struggle with is just their own self image and understanding that they are becoming a business person. And business people, I think, are just open to opportunity, and they see the world in a little bit different way than a lot of other people who punch the clock every day at work,

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I often struggle with tuning out all the ideas and observations that I see in the everyday life of things that could be better, better executed, better done. And it always surprises me when people say to me that they just can’t figure out what kind of business to get into. Anyone else you guys want to join in? Yeah, sure. You just expand on that. David’s point about becoming a business owner, one of the things that helped me, partner of mine, said, You know, if you’re thinking about starting a business, try as best you can to imagine that you already own the business. And what would a day in the life look like? What would it feel like? What what is the impact? What are the sacrifices that you’re going to have to make? You know, to make it easy, if it’s a restaurant, what does that mean, I’m going to be there Saturday and Sundays. Or if it’s an HVAC service business, what does that mean? Am I okay with getting into the attic, you know, all of those kind of things. Imagine that you’re in that business. And is that something that fits you? But going back to the question you initially posed Giuseppe about buy versus build it. You know, I’ve done both. And when people ask me, which one should I do, one of the things I think people should consider is, is this your first business? Is this your first foray into business ownership? And if so, then I want you to think about really heavily, considering buying an existing or doing a franchise, because there is a lot more there that you’re going to leverage that’s already in place, versus you having to create it from scratch. Now that could include a business location that you open from scratch, but you’ve got the hand holding of a franchisor there. Well, so a couple of things to think about. I always come from everything from a financial lens. So where are you financially and are you ready to buy the business? And so that looks at your personal finances like people who buy a business think it’s going to make money day one, and depending on how you build it, maybe it does, but more often than not, I don’t think it does. I tell people, if you’re starting a business, it’s three years to get to a good point, even if you’re buying a franchise, if it’s not running currently, you’ve got all those ramp up costs that you have to do. And then if you’re buying a business, the question is, can you afford the financing? And what does all of that look like? And then there’s just the volatility of owning a business, right? You got to make payroll all the time.

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Life happens, things that you expected don’t go as expected. And so what kind of cash reserves do you have to be able to weather that storm? And do you have excess cash outside of just your starting capital? Do you have operating capital? Half of all businesses don’t make it more than, I think, five years, and one of the biggest reasons is cash. So you’ve got to make sure you’re in that place, that your home life can support whatever that is. Maybe it’s a spouse working. Maybe you have some other way of making money, but your first couple of years don’t expect a big paycheck, you know, just just to build on that rocky the financial part is, is really, really important. I meet people all the time who want to buy a business because they believe that on day one they’re going to be able to start making money and and to be honest, if you do a deal correctly and it is the right deal at the right price, you.

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You should be making some kind of investment, even if you’re borrowing money to do it, and you should be making money on the very first day that you own it. And when people, when people struggle, they don’t make money, it’s usually because something is wrong with the deal. They either haven’t structured the financing correctly, or they’re overpaying, perhaps. But I meet a lot of people who just do not have the financial strength to pull a deal off, and they end up trying to band aid and duct tape a deal together using the incorrect types of financing. They’ll use, like, you know, short term financing. They’ll try to get in advance on a credit card. Like, they’ll patchwork all this stuff together and then put themselves in a really bad position. I’ve told more than one person who was trying to, you know, Band Aid a deal together. Hey, you just don’t have the capital for this. If you want to get into business, you’re you’re probably going to have to look at starting something, and if you need money right now for an income, then you’re probably going to have to look at starting something on the side where you can keep some kind of income stability with a job and maybe explore some kind of side hustle thing that you can then grow over time. And one of the things that I find people very much get into trouble with is that their expectations are askew by maybe what they’ve been consuming online. You know, the the average age of a successful startup and the average age of a successful acquisition is like mid 40s. But if you watched Instagram, you would think that everybody’s doing this and getting rich at 23 right and and I’m meeting so many people now under 30 who literally feel frustrated because they feel like they’re behind because they’re comparing themselves to this stuff that they’re seeing on on Instagram. And I have to say to them, like, that’s media like that is meant for consumption, and it’s meant to be addictive, and it’s meant to create a feeling within you, to keep you looking at it. Yeah, I couldn’t agree more. I always say, Get get the financials in order. How are you looking to run this business if you’re going to leave your job to run this business? I always jokingly say, if you’re the only income earner in the household who’s paying your your rent, your mortgage, your student loans, your utilities, you need to have that financial buffer. There’s also going to be different ways of funding it, if it’s a resale, if it’s an existing business that you’re acquiring, or a brand new franchise. So get those financials, and it’s okay not to have all the answers, but it’s not okay not to have your financials. You can run different scenarios. If I keep my job, you know, maybe my costs are going to be a little bit higher, but I’m going to hire a general manager with that being said, you know, getting into kind of our second topic is due diligence trap and avoiding that bad deal. We’ll start off with, you know, what’s the most common math mistake buyers make when they look at the seller’s numbers? So I guess the question is, are the sellers numbers trustworthy? That’s the first thing. How do you know that they are real? And one of the things you’ll realize is, when someone goes to sell, they’ve spent a couple years fixing up the house, so to speak, right? They make things look pretty. And you’ve got to ask yourself, Is this real? And that’s a whole process to go through, also comparing what the financials say to what the tax return says. Do they match up, or do they not match up? Because if they’re lying to the government, what are they telling you, like, where is that? That trust coming in? The other thing is, you really have to understand the balance sheet and how the balance sheet has changed over time, because you can hide a lot of mistakes and a lot of problems on the balance sheet, and if you don’t know how to read that or understand that, you might be getting yourself into a situation that isn’t perfect. In other words, you know, I remember I was looking at one deal. It was a car wash, and when you looked at the balance sheet, you realized the equipment was super, super old. And so think about today, you know, all these new, shiny car washes, and you’re running a car wash at 15 years old. Sure, it was making money, but how quickly is somebody coming in across the street going to put you out of business? So it’s being able to understand that and to know what is it going to take for you to run the business after the fact. It’s why it’s important to have a team of people helping you who are familiar with small business financials. You know,

09:26

to extend the the analogy of doctors. You know, brain surgeons and pediatricians have the same medical license. Well, you know, CPAs are out there working with people on on different tax returns and financial statements. But you know, different accountants have experienced in different lines of work. You know, depending on who their clients are and what size of businesses they work for, for example. So it’s important to to build a team that has relevant experience when you’re doing one of these deals. Yeah. Great stuff. Great, great takeaways. Agree with all of this, just to add, though, at a higher level, emotional component to the conversation, the thing I always wreck.

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Amend. And I say it to myself is kind of related to what happens in real estate. Be careful not to fall in love with the business before you finish the due diligence, right? And I’ve caught myself doing this, right? I want this business so bad for other reasons, and so I’m willing to overlook things that might be there if I were to look but a couple other tactical things, and I just had this come up with a client, re a client recently. They’re at the 11th Hour, and it’s just now that they’re visiting, assuming or assignment of the lease. It’s a physical space, and that should have been something that should have been looked at way earlier on. It may it may actually kill the deal because the landlord is seeing an opportunity. It turns out it was on a month to month basis. Well, that should have been something that should have been something that should have been identified early on. So my point there is those other commitments, and then the obvious one that I’m sure we all have opinions on, which is, how much is the business based on the owner, whether it’s relationships with clients or key partners or even the staff. As soon as as soon as that owner leaves, there goes the key staff, because they only wanted to work for him or her. So those are some other things to think about from a due diligence perspective. Giuseppe, yeah, and this, actually, this is a conversation I had with David on the show, I think it was last year. And one thing we talked about was, when you’re looking at the financials, first, first off, I’ve noticed in 20 years of owning businesses, a lot of business owners don’t know the difference between EBITDA, cash flow, net income, profit. They’re just throwing numbers and they’re just looking at maybe their pay, but not looking at the combined efforts of everything combined. But when you look at maybe a business for sale, they’ve been up and running for 20 years, or you’re looking to acquire they may not have any debt. So they may be paying themselves 100,000 another 100,000 in net income, which is great, but when you go and take over that business, you have to factor in, obviously, your loan. What that if it’s an SBA loan, what that loan payments going to be? Your Cash Flow can easily be cut in half, factoring in, you know, what the debt is on any loan, if it’s a brand new franchise, if it’s an existing business, you want to factor everything in and do your own numbers. You know what is at the end of the day, your break even always run the narrow the run the numbers based off your scenario, specifically how you’re going to fund it. Which, I think is, which is crucial, which, which brings me to what are your guys thoughts? And this could be franchise or, you know, in the in the Franchise Disclosure Document, or just in analyzing a non franchise business. What are certain red flags, things that come up where you’re like, hold on a second. This is something that really needs to be addressed right away. We’ve seen some red flags, but I wanted to get your take on things where you’re like, wait a second, let’s, let’s place a hold on due diligence here until this is figured out that and you’re talking on the financial side more so Giuseppe, yes, yeah, I’ll go first. And I think, and I think we’ve maybe already touched on it, but it’s that discrepancy at a minimum, I’m going to look at your financial statements and try to match those up as we can, to your POS system, if there is one to your bank accounts, if I and then to the point that that rocky made, if then I get, oh, well no, because some of that stuff we just, you know, we don’t put it on the books, or we pocket it, or, boy, as Rocky put it very well. If you’re not being honest to the IRS, how honest Are you being with me? So I initially look for those kind of obvious red flags,

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I think, a big tool in looking at any business, whether it’s a new franchise with some kind of statement saying this is what the business could do, or if it’s an existing business, you need to get yourself some benchmarking data. So some common sources for this would be RMA, Risk Management Associates, big public libraries and university libraries often have a subscription. The Canadian industry candidates puts all of their data of a similar nature for free online, and it’s very similar to American data. And basically what they do is they break down businesses by industry category. They break them down into quartiles by either revenue or profitability, and you can see the average income statements and balance sheets according to tax returns. So if you’re looking at some kind of exhibit showing you what the business should do, you should go examine a benchmark business of the similar quartile, similar size, and see what they really do, and just look for things that might be missing. You know, is the cost of goods sold way different than what you’re being told. Are some of the overheads different than what you’re being told? Are there things like insurance that are way higher in the actual example than what you’re being shown in the exhibit? Just to make sure that something hasn’t been forgotten, I you know, at the end of the day, I think it’s getting copies of the bank statements and actually doing the due diligence of them. And today, with AI, things are a lot easier, I think, a lot faster. But just going through and saying, How did the money actually move through the business? Prove it to me, show me that it came in and out of the bank. And how does that compare to everything else I’ve seen? And.

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It realistic, and I think that’s a big part of it. If you i A lot of people just assume things. They don’t do their due diligence, they don’t check, even if you’re buying a business, just go visit the business, like walk in and see how business goes. See not to say that you’re there to buy the business, pretend to be a customer, because if all the employees are disgruntled, or you start to realize, hey, where is all this traffic? Because I don’t see anybody in here. What you know? What are the different things that you notice just by observing? It is amazing to me. You see, I see two extremes, right? There’s a few people that over analyze things, but the majority of the people to Rocky’s point, it’s amazing to me. Like David said, either they come to us after they’ve already bought it, or at the 11th Hour and they haven’t, they’ve just taken things at face value, which is very interesting. I think that’s why a critical takeaway here in this stage, you should get some help. One last thing that I think is critical, that sometimes it gets overlooked, is on the supply side. So businesses that are dependents, maybe on one or two key suppliers, and that relationship is volatile at best. That’s something that I think also gets overlooked. Often. Love that that makes a lot of sense. All right, we’re going to go into our third topic, the mindset of the right fit. I’ll kick this one off. This is a big topic that we cover quite a bit, especially having an introductory call with someone that’s looking into owning, potentially owning, a franchise. And that’s the the trap, the mindset shift from employee to employer. That’s a major shift, and I work with a lot of individuals that have never owned the business before. And you know, one of the questions I get is, well, how quickly can I replace my $100,000 salary? And so that’s really not, you know, the question to be asking. You definitely need to be aware on the money side, but really keep in mind what you’re doing here, right? We’re building an asset. We’re building a vehicle that is going to grow. But ultimately, what is the goal of this business? Is it? Is it to create a legacy for the family? Is it to sell, you know, in five or six years and and retire and and live off the proceeds of the sale? So you know, when you’re when you’re making that shift from employee to employer, employer, I always say you’re signing the the front of the check. Employee, you’re signing the back of the check. This is your baby, this is your business, and no one is there to bail you out. Franchise or not, you’re there’s definitely support mechanisms, but you are still in charge. It is your responsibility to find the right staff, follow those systems to eventually exit, which we’ll talk about in the in the third episode here, and eventually selling that business. So the the mentality is really this builder mentality, setting the expectations that what I recommend to everyone is treating the first year as a builder year. Keep in mind, you know what you’re looking to do here. You’re looking to Is it, is it financial freedom, which I talk about on the show. Is it time freedom? Is it both? Eventually you want to buy your time back. You want the this business to be not necessarily on autopilot, but those systems in place for it to grow while you’re not in the business. 24/7, so I’ll jump in then. So two things that come to mind immediately on this which is in making that transition, as I did, from the corporate world, I think all of us did into business ownership, is decision making and accepting mistakes. So I think it’s one of the things that leads to decision overwhelm or paralysis, or whatever you call it, that we all experience. But I think early on, what happens obviously, when we’re in the corporate world, even if we’re in a pretty senior position. We’re not making the ultimate decisions, as you put it very well, yeah, we we take home some, some of the issues, some of the problems where our department, or whatever we’re responsible for, but not all of it. We get to clock out. Now, when you become a boss, it’s all your responsibility. You have to make all of the hard decisions. And I believe that one of the traits that you have to have, or mindset shift you have to make. Giuseppe is you have to be a person that wants to be the decision maker. You have to embrace decision making. That doesn’t mean you’re not going to hit a wall sometimes and experience fatigue, but you have to want that. Because guess what? That’s what comes with the territory. You won’t be able to wait for a committee or somebody above you to make the big decisions. And these are decisions that nobody has necessarily the right answer to, but you got to make a decision, are we going this way? We’re going that way, and it can be critical to the business. And then the fact is, then, when we’re making that many decisions, just like being up at bat in the game of baseball, if you hit 303 out of 10, you’re, you know, if you hit four out of 10, you’re probably going to be in the Hall of Fame, so you’re not going to get every decision right and accepting that, I think those two things go hand in hand as a mindset shift, transitioning from the corporate world to business ownership. I’d like to add to that 400 batting average comment you just made, because it’s true.

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You can be a great baseball player and not hit every ball. And one of the things that leads people into business ownership is this understanding that you know how to do it right, and you know what customers want, et cetera. And in order to accumulate some degree of wealth to get into business, you’re probably a pretty capable person, right? And so one of the problems that happens is you get into business for yourself, and yourself, and you probably do know how to do whatever it is better than a lot of other people. And because of that, you don’t want to let other people do things and let it happen to a degree that may not quite be as good as you do it, but you have to learn that, that you have to build your business around the understanding that other people may do something that isn’t quite up to your standard, that isn’t quite done as well as you can do, but it still will exceed the expectations of the customer and make the business move forward. I find learning to to shed the shell of perfectionism is probably one of the biggest mindset, mindset shifts that a lot of people have to make when they get into business, agreed, agreed, agreed. Yep. I think entrepreneurship in itself is a self development journey, and if you’re not, you know, improving yourself, you’re going to find yourself stuck going back to the question, though, you know, making money. I think even existing business owners struggle with this. Revenue doesn’t equal profit. Profit doesn’t equal cash, and the government’s going to tax you on profit, regardless of whether you have cash, and you’ve got a pretty hefty tax bill that’s going to come due. So while the numbers on the spreadsheet say, Hey, I’m going to make 100,000 this year, the government’s going to take probably more than that, and you may not have the $70,000

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because it’s sitting in accounts receivable that somebody owes you money, or it’s sitting in inventory because you had to buy stuff that had to go out for that big order that was going to make you all the money. And so cash loves to hide inside of businesses, and most business owners have no idea where the cash is hiding. So yeah, on paper, it said you’re going to have cash. In reality, maybe, maybe not. The only other thing I’ll say is that becoming a business owner also is about what sacrifices are you willing to make, and usually they have to do with time that you’re going to take away from something that you’re giving it to now that you’re going to have to dedicate to the business. And I think, along with the fallacy of I’m going to make the same I was making before day one or month one, I think we all see that in financial performance, that ridiculous acceleration to break even, but the sacrifices, this is going to be the hardest job you’ve ever had, at least initially in the startup phase, at least I haven’t found a type of small business that doesn’t require that initially. And what sacrifices are you willing to make? And sometimes it’s personal sacrifices with with people that you want to spend time with, and now you may have to dedicate to the business. That’s why I always ask people, if they’re in a relationship, what is your spouse or partner? Are they bought in? Because it really takes a sacrifice to make it happen. In my experience, yeah, the opportunity cost. Sorry, Dave. Well, I was just going to add to what what Henry was saying. You know, I had a conversation with a banker not too long ago, and he said the number one reason he turns down business loans is because the people are too strapped with personal spending debts, RVs, boats, motorcycles, cottages, like and he looks at them, and he’s like, You want me to lend you money for this business, and you’ve got all of this cash flow strain on the personal side, like, if you were serious about this, you’d be getting rid of some of those toys and not just tell the banker, just do it right? It’s like, yeah, I will do it well, show me, and we’ll get this loan approved. It’s, uh, yeah. It’s i to Henry’s point. Opportunity costs, everything, if you can spend the the extra time. You know, I started my business that my son was just born the same year, so I knew that I had those first couple years while he was a baby, to get the hours and the systems in place, but there’s always an opportunity cost. And you know, one thing I coach people on, too, is when you’re launching and finding that right business, is that learn the business. Do you know I just I like, I wanted to touch everything. I did bookkeeping, I did sales, I did marketing. I wanted to appreciate. It gives you just a better I’m not saying you have to do this forever, but you get a better appreciation. You learn about the things you enjoy doing. You learn about the breaks when you’re when you’re buying an existing business. You learn about the brakes. Where can I fix things? You know, where is, where am I losing cash or profitability? So you start to dive in. You start to learn, and you fix things once the foundation, those systems are fixed now you’re taking that step back and really working on the business.