Even if you're buying something that isn't quite exactly what you envisioned that you would
like to have, because we get this idea of buying a profitable platform.
Once you have a business that is making money for you and it contains a
lot of the resources that you need for whatever it is that you really would
like to do, you can then build that new thing, that new concept,
on top of that existing business, and you're basically given yourself infinite runway
because you're already making money from day one. You're listening to carry Letts's Financial
Survival Network, where you get valuable information you just can't find anywhere else to
thrive in today's trying times. You need the Financial Survival Network now more than
ever. Go to Financial Survival Network dot com and get your free newsletter and
gift. Financial Survival Network now more than ever, and welcome you are listening
to watching the Financial Survival Network. I'm your host carry Lets. As we
to the dog days of August, you might be thinking what should I be
doing? Should I start a new business? Should I buy a business?
You got some extra cash, you want to do it in the least risky
way possible. However, you want to get the maximum return. And someone
who's an expert in that he hasn't been on the show in more than half
a decade is David Barnett. David's got about twelve books out there, I
think, and hey, your latest book Smarter than a Startup? But among
them it's how to Sell My Own Business? I did that invest local credit
card advantage, Twelve things to do before you consider selling your business, and
a bunch of other books too. David, it's great to have you back
on the show. Hey, Carrey, it's great to be here. How
are you today? Excellent? So, looking at your latest book, you
kind of tip your hand in the title Smarter than a Startup? Tell us
about that? Yeah? Sure. So you know, a lot of people
want to get into business, and there's an awful lot of content out there
about starting a business and what it's like to start a business, how to
plan to start a business, and so the purpose of the book was simply
to give people a pro and con of why it might make more sense to
look at buying a business instead of starting one, even if somebody has some
kind of unique and creative idea. And this is the key, because I've
witnessed this in my own career, where someone has wanted to start a new
kind of business and maybe the market was improven or they didn't really know what
the demand was going to be. And so you guys, you can imagine
starting a business like that entails even more risk than the average business startup.
And so what I've seen people do successfully is by existing profitable businesses that just
happened to contain some of the resources they needed for this new idea that they
had. And so it's almost like the idea is to acquire a business that
can provide an incubation base for the new idea that you want to explore.
And it's all about reducing risk at the end of the day. All right,
So I've started businesses. Most of the businesses I've been in started from
the ground up, but I've done a few turnarounds, and I can tell
you that it's easier to do a turnaround to buy an existing business, even
if it's marginally profitable or losing some money a little bit, not humongous losses,
but manageable losses, and then to turn it around because you know,
when you start a new business, you've got to have a system for everything
and even though systems are easier than ever because of the cloud based applications out
there like quick books online, like so, like CRMs client to you know,
management systems. Even with all that, it's easier to get a company
that's running all right, that has that has dollars coming in the door,
even if they're doing things wrong. Then it is to start from the ground
up. Well. Yeah, and I think the thing that you're pointing out
there is that one of the most difficult things to get in businesses the dollars
coming through the front door. And it's that race to get enough customers fast
enough that many new startups loose and they don't quite get to the point they
need to to hit that break even point. Or I like to point out
that you know, once you hit the break even point and you're breaking even,
you really haven't broken even because then you got to recover all the losses
that you put into it over the course of time that it took you to
get to that point. And so it really is an uphill battle. It's
hard to get a new business up and off the ground successfully. Yeah,
and very few people are able to keep them going five years or more.
Right, Yeah, it's true and so this is why in the book I
propose the idea of instead of starting, you should be looking at buying,
even if you're buying something that isn't quite exact actually what you envisioned that you
would like to have, because we get this idea of buying a profitable platform.
Once you have a business that is making money for you and it contains
a lot of the resources that you need for whatever it is that you really
would like to do, you can then build that new thing, that new
concept, on top of that existing business and you're basically given yourself infinite runway
because you're already making money from day one. You know, people will say,
well, what about the money. It costs a lot of money to
buy a business. And the fact is that when you buy an existing business
that is already profitable, it opens the doors to a lot more in the
way of financing opportunities because lenders can see that the business can afford to make
repayments. It's when you start something new that you have no proven track record
or no cash flow to look at. This is this is difficult. And
you know, if you've got money accumulated that you're going to use in your
startup effort, you can very often and parlay that money into doing an acquisition.
So there any secular sectors that you like right now that if you were
looking to start a business or buy one, you would be looking at.
I'm a big fan of that cliche. The riches are in the niches,
and so I always tell people that, as far as I'm concerned, one
of the best things you can do is look for businesses that don't have a
high degree of visibility, so industries that are not really front and center and
very public all the time. And look for industries where you're able to get
healthy margins and you can protect them in large part because other people just don't
happen to notice. You know, very public, very front stage kind of
business that is doing well. We'll attract attention and ultimately attract new competitors.
It's a function of capitalism. Hey, what do you think of the property
management space? I like property management, and one of the big reasons why
I like it is because it's a service business with little in the way of
capital assets. You basically are making a real estate play without having to invest
in real estate. Right now, it's competitive and you have to have great
systems and execution. But if you can do the job correctly and your customers
are happy, they'll probably stick with you. It's one of those businesses where
oftentimes it's not because someone else comes along and steals your client from you that
you lose a client. It's because you did something to upset your customer.
And a lot of the times I've worked with people in similar industries where they'll
describe their sales cycle as waiting for their competitors to mess up, you know,
and creating an opportunity for them to come in. I was going to
say that, so, like with property management, people are always upset,
especially you know, it's just a huge level of dissatisfaction for a lot of
reasons. A lot of them aren't doing what you should be doing here,
right, So really there, pulling customers away isn't a big deal because most
of the customers are looking anyway because they're dissatisfied with their existing company. Well,
you know, I've got some experience in this because I used to own
apartments and I remember I was looking at different management companies and then the one
I chose they really blew me away because they had a Then this was over
ten years ago, but they had a really up to date system, so
they would send me these detailed reports at the beginning of the month showing the
collections and everything they had spent on. And every time they got calls from
tenants about certain issues, I was kind of kept in the loop with a
CC email, and so I knew what was going on, and I was
always informed and feel like I was in the dark. And as in any
sales or any kind of customer service management, setting expectations is the number one
thing, isn't it. And so if you keep setting expectations and letting people
know what's going on, it's going to be harder for them to be upset
with you. Yeah, and that's great they had a system in place.
Although too much information could drive you a little batty, But maybe that's the
idea that just dumps so much on you that you wind up just ignoring it
and saying they're doing their job until you find out otherwise. What about this
concept that buying a franchise, Well, yeah, one of the other books
that I wrote a few years ago is actually called Franchise Warnings, and it's
one of the few books out on Amazon that actually talks about some of the
downsides to the franchise business model. There's a lot of success in the world
of franchising. You really have to look at what you're getting for your money.
You know, when you start a new franchise location, you're dealing with
a lot of the same issues that a new startup has. You have to
get customers that are being served presumably by someone else right now, so you
still have to fight for that in the front door revenue, you still have
to find your place in the market. And on top of it all,
you've got almost an extra layer of government over your head. You know,
the franchise or takes a cut off the top and can dictate to you how
when you do things and when you need to spend money on upgrades or improvements
in this kind of thing. And so it works very well for some people.
If you're super creative and innovative and very entrepreneurial, it may not be
a good option because you have to very much color within the lines when you're
part of a franchise network. But for some people, you know, if
you've got a background and experience of living within someone else's rule set, it
can work out all right. So, yeah, what about buying an existing
franchise location that's already producing income. It's you know that, that's actually one
of the suggestions that I put in my book Franchise Warning. So I'll say,
if you really are in love with a certain franchise brand, the best
of both worlds is to find an existing location that stuff for sale, because
then you can actually get a peak at its actual track record, right,
and it's already got the performance in place. And it's interesting because resales in
the franchise world will sell just like this, just like any other independent business
will sell for the price is a function of the cash flow, whereas in
new location the price is a function of what it costs to build it open.
And it's interesting because within many franchise systems, you can often find resale
units that are cheaper to buy than opening a brand new unit. Yeah,
because it could be millions of dollars to open the unit, right, hundreds
of thou Yeah. Especially with some of these big physical location type franchises like
restaurants and things like that, you can spend a ton of money on real
estate improvements in buildings that you don't own, and you've got to recoup that
money over the life of your operation, and you know the capital expense can
be can be quite high. That's true. Yeah, all right, So
what about financing? You want to do this business, you want to buy
it. Banks are pulling back now, as we've seen from the banking crisis,
So that's putting the squeeze on people, isn't it. Well, it's
becoming more and more difficult. You know, they're in the United States.
Anyway, there's still a great deal of SBA financing being done on business acquisitions.
If the deal cash flows, bankers will make the loans. The challenge
for a lot of sellers is that, you know, they want the prices
that people were getting in twenty twenty one, and the reality is that with
these higher interest rates, buyers just can't afford that. The cost of the
money, the higher interest payments have to come out of the cash flow of
the business, and most prudent buyers are pricing in even higher interest rates.
SBA seven A loans are variable, and so people buying today are being quoted
ten ten and a half percent by their bankers, and I know people are
planning for another couple of points of increase, So this means they can't afford
to pay as much as they used to. I know that some deals are
falling apart because of that, but you know, I believe that for those
sellers, they're not really paying attention, and it could be that their business
may be worth even less down the road at these rates continue to go up.
Yeah, probably they'll never forget more money for the business than they'll get
right now. Right, Yeah, well, you know it, hindsight is
always twenty twenty, right, And twenty twenty one was a fantastic year for
people to exit. There were all kinds of government programs who were taking advantage
of, and interest rates were low, meaning buyers could pay top dollar.
You know, you've got a powerful entity out there, you know, the
central Bank, who is actually trying to create a recession. And I don't
know why people don't pay attention to that, but usually what those guys want
they get. You think they'll be successful in creating the recession they're looking for.
I think they're going to try until they get it, until they get
the right formula. Huh yeah, yeah, Well they're trying to get inflation
under control. All right. So you've been at this game for a while,
David. Going back, if you could go back to yourself twenty at
age twenty one, what would you tell yourself at age twenty one? That's
a great question. Carry I would probably not change anything. You know.
The path that I've been on that has led me to where I am today
has been a pretty good one. I probably would have told myself to buy
Brix and sell it a hundred. How about that. I'd probably been good
advice back then. I would have told myself to buy Tesla and never sell
it at least, but in any of the hindsights twenty twenty, but as
far as maybe you could have done things quicker, more profitably, avoided some
mistakes. Yeah, you know. It's it's interesting because every time I want
to look back at something with a bit of regret, I realized that part
of what I learned in that period of my life is valuable to me now.
And maybe maybe that's the lesson. It's just no matter what you live
through, you know, look for the value that you're generating for yourself.
It's funny today, you know, I promote myself on YouTube and for example,
and you know, earlier in my life I was actually on the radio,
and so part of that experience helps me today. You know, I
went through a career of owning a business brokerage office. It was a crazy
up and down roller coaster of cash flow. It gave me all the gray
hair I have. But living through that experience gave me the knowledge understanding that
I need today to do the consulting work that I do. And so I
think, as long as you are learning and developing yourself, even if things
seem rough, take what you can out of it. There's a great book,
you know, Gene Simmons, the bass player there for Kiss. He's
got that great He's got a book called Me Inc. In which he describes
his own journey back and forth between self employment and employment, you know,
and his advice to people is to always be doing things that develop yourself and
take a job. If you can develop yourself and learn something from it,
build upon that in your next enterprise. And I had just thought that book
was amazing, and I would I would repeat the same kind of sentiment,
you know, that you live through things and you'll learn along the way.
He will. Hey, my father always used to say, anytime you go
into a new business, you're gonna pay for lessons, right absolutely, yeah,
Yeah, and you're either going to pay with time or money one of
the two, but you're going to pay right Yeah, So hey, your
top just before we go top three businesses, segments, industries, if you
will, that you would be looking at if you were going to buy a
business. Now, if I was going to buy a business, I would
be looking at again, things that cannot be delivered by Amazon number one.
So you don't want to be competing against these big trend trends in the marketplace.
So something that can't be delivered by Amazon, I would be looking at
something that would leverage AI at the small business level. So AI is being
put into everything right now. You know, big companies are using it in
a lot of different ways, and so if you're in the world of small
business trying to compete with big companies, you're probably going to be at a
disadvantage. But if there is some reason why your industry is always going to
be dominated by small business people like yourself, a vastly diversified ownership of enterprises,
then you want to look for something where you're going to be able to
employ AI. So think about something like auto repair. There's always going to
be auto repair. It's likely always going to be small, local, independent
businesses. But is there you know, something like auto repair where AI could
come in and really help you if you're open to it and open to experimenting
and implementing new things quickly. So that would be the second thing. And
the third thing, like I mentioned before, is good margins. You know,
gross margin is probably the most important line on the P and L,
and too many people, I think don't understand that. You can get into
a lot of trouble in business if you don't understand your margins, understand where
you should be for your industry and defend that margin properly, or build a
reason why people want to or choose to or need to keep doing business with
you over competitors. Right, all right, well, hey, they really
appreciate you coming on. Tell us where we find you, how we connect
with you on the web these days? Sure, I can always be found
at David C. Barnett dot com. It's my blog site. There's an
email list there that people get signed up to, and if you're interested in
learning more about buying, selling, financing, or managing small and medium sized
businesses. My YouTube channel has over six hundred videos, almost entirely created by
questions that people have submitted and I put the audio of that onto the podcast
feed. So if you just look up David Barnett Small Business, you'll find
me all right excellent. The link is in the show notes this interview on
Financial Survival Network dot com. Make sure you click it. While you're there,
go sign up for your free newsletter. David. Always enlightening, always
interesting speaking with you, learning things about businesses that I didn't know. We
will definitely talk to you again, and we won't let half a decade or
more go by. Sounds good, Carrie, Thank you, thanks for listening
to carry Lets's Financial Survival Network, your solution to today's trying times. For
the latest, go to Financial Survival Network dot com. Financial Survival Network now
more than ever