What would have to happen for you to build up your company to be able to sell it for high profits… where you’re in a place where you have the luxury to enjoy the things that you want to do, or spend more of the time doing the things that you love to do? David Barnett has been working with small and medium-sized businesses for over twenty years in marketing and finance. You will discover how to build your company to sell it (even if you don’t plan on selling it), will show you how to maximize your greatest asset in the business, as well as help you understand how to value a business whether you’re on the buying or the selling end of the table. Today, David works with business people around the world (like you) helping them through the process of buying and selling companies on their own.
Listen to the podcast here:
Building Your Company to Sell It for High Profits with David Barnett [PODCAST 179]
What would happen for you if you actually set up your business to be able to sell? I’m talking about being in a place where you have the luxury to enjoy the things that you want to do or maybe you’ll be in a place where you could spend more of the time doing the things that you love to do. What would have to happen for you to build up your company to be able to sell it for a high profitable exchange? We have an expert who is uniquely qualified to be able to talk to you about how to structure your business to sell it. He’s even got some strategies of how you can even look at it if you’re going to buy it.
His name is Dave Barnett. He’s been working with small and medium-sized businesses for a couple of decades in finance and marketing. He’s the author of multiple bestselling titles including Franchise Warnings, How to Sell my Own Business, Invest Local. He’s been a finance broker and a business broker. What does that mean for you? It means he’s uniquely qualified to help you grow your business, to set it up, set the stage so that you can look to exit, to sell it and/or be able to buy it as well. He works with people around the world, helping them through the process of buying and selling companies. He’s here to share some of how that can help you now. Dave, welcome to the show. How are you?
I’m doing great, Dan. Thanks for having me come along.
I’ve had a chance to dive into some of your resources here. I’m impressed, number one. Number two, you’ve got a lot of stuff available to really simplify this. I’ve had eleven companies, which means I’ve got a t-shirt with some tread marks on it. Which means a couple of those businesses failed and it means I had to bury him in the backyard. I know you’ve never met anybody like that. I’ve had a few successes where I was fortunate and blessed where I was able to exit and sell a few companies as well, seven figure companies, eight figure companies and such. I find this topic really relevant because it’s not just about selling, but it’s getting prepared to set up the company to operate without you. You seem to have navigated that really well. Before we dive into some of the strategies and techniques and such, I know we’ve got a lot we can do, why are you doing what you do? What is it that motivated you to do this?
Dan, why am I doing what I’m doing right now? I am the guy who has always been the thinker. The guy who wants to try to figure out problems and figure out how I can solve problems for other people and help show them the correct way to do things. I’ve ended up in this place because of all the places that I’ve been. I started off right out of university in a sales career that was related to marketing and advertising. It was an eye-opening experience for me. It was back in the days when the yellow pages were a really relevant media. I would go and I would visit these small, local, everyday main street businesses, your tire shop, your candy store, your flower shop, the cobbler, the tailor, all these guys. I would ask them, “What kind of customers are you looking for?” I would help figure out how we could best attract the people that they wanted to have come through the door.
It was a really big departure from what I learned in university because I went to business school thinking it would help me be a businessman. In reality, what they teach there is how to be a cog in a big wheel of large enterprise. That’s not the business experience that most people have. I loved working with business owners and business managers, just that relationship with business people. As things progressed, I was always drawn to businesses where I could work with those people and work through helping to teach them things. It started with advertising and then I got into finance where I was a finance broker. It helped people get money to grow or expand their businesses. People coming to me at that time, looking for money to buy an existing business is what eventually led me into business brokerage.
When I was a business broker, I ran a franchise office. For three years, I was buying and selling businesses that other people owned. Eventually, I got out of that industry because it wasn’t working for me anymore. It wasn’t delivering what I needed, being a father of two young kids. Namely, the cashflow was horrendous. It was up and down and up and down. If you looked at the financial statements for that business, what you would have seen is year over year a revenue, gross of 40% to 50% and it looked like everything was going well. What you don’t see in those statements is that there will be these droughts of seven, eight, nine months with no deals closing. Then a bunch of deals with close and money would come through the door, but you’d be afraid to spend it because you didn’t know when the next deals we’re going to close.
There’s a reason why so many people in the business brokerage field are retired from something else. They have some pension income so they can weather these ups and downs. As a 30-something guy going through that every day, being in the office at 7:30 and staying there until 5:00 trying to make these deals close and trying my darnedest to get one to close every month, basically all the gray hair you can see on the side comes from that period of my life. I left that and I went into banking.
I became a banker. I was managing liquidity programs, revolving credit programs for medium sized businesses, which were a little bit bigger than my experience. What was happening is while I was working for the bank, the phone just kept ringing. It was people who were referred to me personally, people who wanted to buy a business or sell a business. They were looking for help. Initially, I just told those people that I didn’t do that anymore. Eventually, what I realized is that people wanted access to my experience and my knowledge and I didn’t have to be a broker.
The biggest lesson I learned is that when I had a business brokerage, I was pretty much stuck on that business model of being a broker and collecting a commission when I sold the business. In reality, there’s a huge appetite for people to use my knowledge and wisdom the same way that people will go to an accountant or go to an attorney. You want a certain thing done and you pay for that thing. That’s how I work now. People come to me, either buyers or sellers and they work with me to analyze a business or to prepare one for sale.
As I do each step through the process, I billed them for what I’ve done. It means for me, that I’m sending out invoices to my clients every week. I avoid that cashflow rollercoaster. For my clients, it means that they’re spending a lot less money, but they’re all spending money with me. The thing about the business brokerage world that people don’t really think about is that the reason that business brokers have to charge such large commission rates is that for every business that is a winner that is sold, there could be multiple businesses that are never sold and the brokers putting all time and effort into those businesses.
The person who builds a great business that’s very successful and profitable that people want to buy, that person ends up subsidizing that brokers efforts to try and sell the other businesses that people don’t want. That’s not really fair. Both buyers and sellers like the model that I employ now. The other thing that happens is that the conflicts have been removed. Buyers are always wary of accepting advice from any broker because they understand that the broker gets paid when the buyer buys something. You don’t go to a real estate agent and say, “I need a place to live and expect him to tell you to rent an apartment.” That’s not what he does. He sells houses. The buyers would come to me and I would talk with them about the businesses. It would be difficult for me to tell them, “You shouldn’t buy a business. I don’t think you’re the right person for this.”An argument can be made that oftentimes brokers’ interest is not directly aligned. Click To Tweet
From the point of view of the sellers, you think they’re being paid by commission, you’d have a full alignment of the interests between the broker and the seller, but it isn’t quite so. I’ll give you an example. If somebody wants to sell their business for one $1.1 million and someone comes along with an offer of $1 million, to a broker, if you’re on a 10%, it’s $10,000 less. For the seller, it’s $90,000 less. It’s a far easier for the broker to encourage that deal to be accepted because for the broker it’s a much smaller loss of position or earnings than it is for the business owner.
An argument can be made that oftentimes brokers’ interest is not directly aligned. Nowadays, when I work with a buyer, a lot of the times I tell people that the business they found sucks and that they shouldn’t buy it. When it comes to sellers, I give them my honest opinion and my honest evaluation. I show them why it makes sense to sell at a certain price and what I think they can get for it. It doesn’t really matter if they choose to sell it for less or if they hold out for more because they’re going to pay me for that advice. I don’t have an interest in the actual proceeds of the transaction anymore.
You’ve moved yourself into a trusted advisor role, which is always a great place to be like the CPA, like the attorney, anything like that. Before we get into a couple of strategies, I’ve got to ask based on your history of how you came through to where you are now is what’s been your lowest point in your business? As you think about your journey or maybe your biggest mistake or failure you’ve ever had, what did you learn from it and then how have you used it in this vehicle, this platform that you’ve built now?
The lowest point was the fall of 2011 because I was going into that season at the end of August. There were six different deals on the table that we’re going to bring in about $250,000 of commission for me. One deal fell apart because it was a franchise business and the franchise war was a jerk to the buyer, and the buyer pulled out. He said, “I love the business but I’m not going to get into bed with those guys.” Then the second deal was in an unregulated industry, the buyer needed to qualify for a license from a government agency and they wouldn’t issue it for whatever reason. Maybe the guy had a criminal record or something, but basically this government agency said, “No. We’re not giving a license to that guy.” That deal fell apart. The third deal fell apart because a bank that had issued a funding letter, unissued it. They resend it. They just said, “We’ve changed our mind. We don’t want to finance that deal.”
Three deals where the buyers wanted to buy and the sellers wanted to sell under the terms that they had come to fell apart and it had nothing to do with the buyer, the seller or me. It was completely these outside forces that caused the deals to fall apart. That’s when I realized that there was just too much risk in the business model as it was set out. The other three deals closed, but my $250,000 shrank to $110,000. It was basically enough money to fill in all my holes. I paid off my lines of credit and my credit cards, that thing. I said, “I can’t live this way.” I can’t even create a budget for my household, which includes putting money into my kids’ education plan because of this cashflow rollercoaster.
Speaking of cashflow roller coaster, for everyone, have you ever found yourself in a place like this where you hit that low point and you said, “I’m going to transform this to my biggest breakthrough.” We’re going to dive into the strategies of buying businesses, selling businesses, some of the biggest mistakes that people make on both sides of this.
You’ve worked with hundreds if not thousands of people through the process either buying or selling or both. What do you see are the biggest mistakes that buyers and sellers make when they come into a deal looking to either buy or sell their business?
I think that the biggest mistakes on both sides have to do with understanding the different roles that people play. When buyers look at the business, oftentimes they won’t understand that they’re actually wearing two different hats. For most small businesses, ownership and management is combined. It’s one. The owner of a small business is the manager and when they sell that business, the management leaves. The buyer is going to become that person.
What most people don’t understand is that when you are working as a manager, you are an employee in the business and that has a certain value. When you buy the business, you’re making an investment and from that point of view, your investor and investors look for rates or return on the capital that they’ve deployed. What will often happen is people will go to buy a business and they’ll look at the seller’s discretionary earnings or the total cashflow to an owner-operator and they’ll say, “I want to put $1 million into buying this business and it’s going to earn me a $100,000 a year.” That’s a 10% rate of return but it’s not, because that $100,000 are the wages for working as the owner-manager.
If you say, “My manager salary in this industry is worth $60,000,” now the business only earns $40,000. Now your investor hat position has to be, “What’s this $40,000 of profit worth to me?” This confusion happens a lot. It happens on the side of the sellers when they priced their business. It’s one of the reasons why businesses get so overpriced, as far as asking prices go. From the buyer’s point of view, if they don’t have any experience with numbers, they’ll overpay thinking that they’re doing something that’s smart.
What unfortunately happens a lot of the times is people will inadvertently indenture themselves. They’ll overpay for a business and by the time they get into it and understand the true cashflow and how much is left for them and the amount that they have to pay out to banks and such for servicing their debt, then they’ll realize, “I’m stuck in this position. I’m not going to be able to get out of it until I put a few years in.” That is like that starving guy in Ireland during the potato famine who signed away five years of his life in exchange for a ticket to the new world and that’s not a wise investment.
There are so many different ways to go about this. Related to the business value, I’m sure you’ve never seen this before where a seller of a potential business just thought that their business was worth so much more than it really was. You’ve never seen that before, I’m sure of it. What’s the biggest mistake you see in someone who let’s say you’re doing X in business and they think their business is worth twenty times, ten times, even five times. What do you see as the biggest myth or misunderstanding there in valuation?
One of the biggest problems is that people will share these ideas about a business being worth four times, three times, five times. The reason why I’m not saying anything after the word times is because this is where the confusion happens. Some people will think it’s a multiple of net income. Other people will think it’s a multiple of the EBITDA, other people will think it’s a multiple of seller’s discretionary earnings. The next problem is if you have financial statements prepared for your business, they’re preparing them according to a gap standard which is supposed to be information for shareholders and prepare you for your tax return and understanding your profit and things like that. They are not normalized properly to tell the story to a business buyer about what’s going on into the business.
I’ll often get people who will have financial statements or an understanding of what their earnings are and they’ll apply that multiplier that they heard from someone. When I go through and I start normalizing things and I make adjustments so that we can make these apples to apples comparison, and there’s a certain set of rules about what is normalized and what is not, and then how you do it.
Most brokers, for example, will try to add back as many expenses as they deem aren’t really related to the activity of the business and then they don’t do the other side. They don’t add expenses that are understated in a lot of businesses. There are many people own multiple businesses and because they own multiple businesses, they get certain synergies. I had a case once where a guy owned two different businesses and they both used a forklift occasionally. One business owned the forklift and the guys from the other business had a set of keys and they went over and took it whenever they needed to use it.
When that business is sold, that doesn’t have a forklift, that relationship isn’t going to continue. You’re not going to be able to just go and borrow somebody else’s forklift whenever you want. That expense needs to be added in because the business is going to have to have a forklift. The other thing that is not really well understood is the normalizing of the balance sheet. When you talk about those multiplier methodologies, we’re talking about an enterprise value and what is included in that enterprise value is everything required to make the business go. That includes what’s called a net normal position and operating capital. There’s a certain amount of cash you need. I was dealing with a client and he was in one of the Western states and it was an agricultural-related business. The farmers would sell their product to him and he would process it and wholesale it. Basically, his business was busy for about three and a half months of the year at the harvest time.
He had millions of dollars that were sitting in the bank that he would use to buy stuff from the farmers and then finances receivables. A lot of that money could have been banks money. He was overcapitalized. If we stripped away what he could have been borrowing at the bank as far as inventory and receivable lines of credit, there is a certain central component of cash that the business required in order to operate. That money could not be taken away from the business. That money couldn’t be invested into anything more than 180-day T-bill in the offseason. That money was sitting there like one of the delivery trucks or any other piece of machinery. That enterprise value includes that central required net position in working capital. This is something that a lot of people don’t get. When you value a business using an enterprise value, and then he turns it into an asset sale and the seller keeps all the operating capital, if you don’t make an operating capital adjustment, you’ve just overpaid for the business.
That’s one of the kinds of mistakes that happens all the time because people aren’t fully versed in how to do these deals. The other thing that happens a lot is that people will rely heavily on the people that they trust. There are a lot of really great accountants out there who has a lot of experience with business transactions, but most accountants spend their time completing tax returns and filling in financial statements. They don’t handle these kinds of things every day. There’s a very big difference between the accounting profession and finance professions.
One’s backward-looking, the other is forward-looking. I’ll often get these business valuations from people that they’ll go to their long time trusted accountant and they’ll say, “I want you to evaluate my business,” and there won’t be any normalization done at the income statement. There won’t be a normalization done on the balance sheet. They’ll use a methodology, like a cap rate method, which is from the world of commercial real estate. Then they’ll use a cap rate which is inappropriate for business.
What will end up happening is we get this document that shows a business owner that the business is worth this number that just doesn’t make any sense. It’s way too high. The danger in overvaluing a business is this. There are different buyers out there. There’s what I call the reasonable buyer and that reasonable buyer, he’s got money in the bank, he’s got retirement savings, he can draw and he’s got home equity. He’s got a good credit score. He has experienced in a certain industry and he’s done a lot of research so he knows what businesses are selling for. If we show that guy a business and it’s overpriced by two or three times, he’s going to assume that the seller is unreasonable. He’s not going to want to waste his time. That’s the exact buyer we need to attract because he’s the one who can really execute a fair and reasonable deal.
What we’re left with are the people who don’t know any better. They might even agree to a deal. They might even sign an offer and once they bring that offer to their banker or to their advisors, then they’re told, “This doesn’t cashflow. This doesn’t make sense if we can’t do this.” The deals will just fall apart. What is really unfortunate is when I meet a business seller who wants to work with me and they’ve been trying to sell for a while and regardless of what they have, I always make them start with the evaluation that I do. I’ll come back and I’ll show them what their business is worth and what it will likely sell for and what terms of sale they can expect. The saddest thing is when they finished that conversation with me and they say, “Dave, I had an offer like that a year ago and I turned it down.” It’s because their expectations were never properly calibrated.
There’s so much distortion on expectations and being ignorant. They see things and hear things, but don’t have the whole puzzle. It’s the tip of the iceberg. You know they got the tip, but they don’t really understand everything else. We’re going to take a deeper dive into a couple strategies and show you even if you’re a small business, a professional service, maybe you run an accounting practice, a law practice, maybe you have a small team of seven, eight, ten people doing a few million dollars, we’re going to back this down from all these terms of normalization and equity, etc., that we’ve been hitting on. We’re going to talk about the asset value of the small business and what you can do to set your business up to be at least prepared for exit and/or for you to be spending more time working on the things you love in your business or even more family stuff and more.The buyer understands that learning the new system was going to be part of the business. Click To Tweet
Let’s say someone is an accounting professional. They’ve got a few people working with them, a law practice. We can call it the traditional, very small business. What can they be thinking about as far as their asset value in the business as far as setting it up, either to two to be in an exit situation or to be spending more time working on their business, doing the things they love?
Business values are based on the cashflow. That’s the number one thing. Number two, people will then adjust what they’re willing to pay for that cashflow based on the risks that they see. One of the examples I use all the time is if you have a restaurant with $100,000 cashflow and a septic pumping business with $100,000 cashflow. That’s septic pumping business is going to sell for far more than the restaurant every time, because the restaurant is a riskier business. If you’re operating a small business, you want to maximize your cashflow. The other things outside of your industry, if you’re a restaurateur, then you’re in a risky business. You’re going to have to accept that. The other things that happen that further modify that price in the mind of the buyer are going to be the barriers that they perceive in taking over the management of the business.
If they don’t think that they can run the business the way you do, then it’s going to make them back off or cool down or only be interested in paying a lower price. I use the example often of a guy with a little roofing contracting business. If he’s going out and he’s doing the quotes and he’s writing the invoices and he’s managing the men and he’s ordering the supplies and everything. Everything’s run on sticky notes and this little note pad that he has in his pocket, then the only person who can buy that business and take over from him is someone with the exact same experience who may be twenty years younger. He’s got to find his clone in order to sell that business. That’s the only person who’s going to feel comfortable stepping into that. You’re not going to get some guy leaving a job at the bank who’s going to come out and walk around on roofs trying to guesstimate what he thinks a good price is going to be for that quote.
If that roofer creates the systems and processes in his business, he creates a tool for quoting to make sure that we never underquote and we always protect our margin and he creates a system for how we hire new laborers. Where do we place the ads? What are the ads look like? Which ads have worked better than others? How do we evaluate our employees? How do we make sure that we’re paying them competitively so that we don’t lose them? If they create all these systems and processes so that the guy from the bank can see that running the roofing businesses is taking up maybe a franchise where there’s a set of rules already in place, then this is going to broaden the field of potential buyers.
The other thing is the terms. It’s very difficult to get money to buy a business. Oftentimes buyers will have to mortgage other assets that they have. They’ll have to mortgage the house, borrow against other assets and may own, take money out of retirement accounts. The easier it is for a buyer to put together the money to buy the business, the more quickly it’s going to be sold, which is exactly the same thing that works with houses and cars.
Car dealers know that to sell $40,000 cars, they need to have financing programs already lined up that they can introduce to people. The real estate agents know that they need to be able to have mortgage financing in order to sell the houses. When someone has a business that they want to sell, if they’re having trouble selling it, my advice is usually if it’s priced correctly is not to lower the price but rather to start broadcasting that you’re willing to accept more flexible terms. That’s the thing that the buyer is having trouble with.
Here’s a little example. If you have a business that owns a building and you sell them together, you’re looking for a buyer that has a down payment on the operating business as well as a down payment on the building. If we separate them and we say, “I’m willing to sell the business, but I’ll become your landlord.” Now, we’re looking for someone who has a down payment on the business alone. There are a lot more people out there who have that amount of money than there are the people with also the money for the building. We can look at how we can divide up the business to make it into more bite size chunks.
Once that buyer runs the business for a couple of years and has their own financial statements showing how well they can run it, they’re going to be able to qualify for a mortgage from almost any bank. Then the second stage of the transition, the sale of the building simply as delayed for a little while and the seller gets to collect rent in the meantime. There are different strategies we employ for dividing things up, making it easier, maximizing the potential pool of buyers and more importantly, removing the obstacles to why people don’t want to buy.
I once had a guy who owned a couple of breakfast restaurants and he was in a meeting with the buyer and the buyer said, “The employees are really important to me. How do I know that they’re not going to quit?” I’m going to rely on these people to run the business. What the seller said to him as he said, “I’ll guarantee within a year they’ll all be gone,” because that’s how this business works. We have turnover and the way that we address it is this. He explained his hiring system, which was documented and it made the objection go away. Because now the buyer understood that learning this new system was going to be part of the business. He was going to have to make sure that he was able to train the new employees on how to do the jobs and he couldn’t rely on other people to do these things, and all he had to do is learn the system.
One of my good friends is Dean Graziosi, who’s really big in the real estate industry. When Dean and I did some projects together, I remember Dean saying, “Buy low and sell high.” Simple psychology. He said, “It’s all about the terms mostly with real estate properties.” Many times he would find that if a property or a thing was for sale, most people would be trying to always undercut it. He would actually go in and offer a couple percent more than the asking price. Then he would say, “However, what I want to look at doing is I want to do it on terms.” What you’re saying is just so critically valuable to be thinking about making it easy to buy. When I was going through the process, one of the struggles I had is I didn’t understand that like in the growth phase of your business, it’s about packaging and positioning and promoting your business, the same thing holds true when you’re focused on an exit or a sale.
You have to package up your business, your company, and you have to position it a certain way. You have to price it a certain way. You have to promote it a certain way. It’s like its own entity in and of itself. We’re going to dive deeper into some strategies you can put in place now, some action steps. We’re going to give you an idea of how you can get in touch with Dave and his incredible resources to help you because he’s got a wealth of knowledge to help you not only build and grow your business, but also to set it up for sale and exit in a great way, or maybe you’re looking to buy businesses too. What’s something I should have asked you that I didn’t get a chance to ask you yet?
One of the things that I like to make sure that I talk about with people is understanding when they’re running their business, what sorts of things that they do every day in the business can be affected to a great degree by their plan for exiting. Most people, when they get into business, they start a business because they want an income. Once they get that income, then run the business and if they’re ambitious, they might still try to grow the business even further. People will make decisions without thinking about that end. We mentioned before, that getting the money to buy businesses is one of the things that people have a difficult time with. If you know that you’re going to sell your business one day and you need to acquire things in your business, let’s say you need a new piece of machinery, if you know that buyers are going to have a hard time getting money, why don’t we try to build in the financing?
When you go to talk with the banker or you talk with the dealer about their leasing program, one of the questions you would ask is, if I sold my business, could a buyer assume this debt? If a buyer can assume the debt, that’s as good as cash in your hand. Otherwise, they’d have to pay you money and you would simply turn around and pay off the bank loan. By understanding exactly what your plan is to get out of the business, you’re going to make decisions along the way. They’re going to make it even easier to sell, once you get to that point.
It’s a little bit more of deeper thinking that, “I just think I want to sell my business one day.”
You mentioned about a packaging up the business. When I was a business broker, I used to say all the time to business owners that your business is going to become my inventory. I once had this cafe owner and I told her, her business was worth $100,000 and she said, “No. I need $250,000.” I said, “Here’s what we’re going to have to do then. You need to implement a policy which says that no one’s allowed to buy one cup of coffee, you can only buy two.” She said, “No. My customers won’t accept if they only want one cup.” I looked at her and I said, “You’re telling me that your success has something to do with thinking about your customers?” That’s when she clued in. She’s like, “We need to consider the point of view of this person who’s going to buy the business.”
They are customer, essentially. They’re just the higher customer.
While most business owners are really good at running the business that they have, the tire guy, he understands the tire business, most of them have never sold a business before. They’re not used to looking at it the way that that a buyer would. Here’s the real dangerous one, is that most business owners started their business. What that entailed for a lot of them was working long hours for very little pay in the beginning to try to build things up to the point where they could get a regular cashflow. A lot of them will then assume that the next owner should have a similar experience. That they need to work long hours for no pay to get themselves off the ground and that’s absolutely incorrect. The buyer of a business is going to pay money and if it’s a good profitable business, there’s going to be something called goodwill and the goodwill is a payment to avoid startup risk. It’s as simple as that. It’s that buyer does not want to go through that period of pain and suffering and that’s why they’re paying you that goodwill figure.The seller knows the business better. The buyer is usually more generally sophisticated from a business point of view. Click To Tweet
They consider themselves more of an investor. They would seem more passive income stream in many cases.
Most of them are buying a job, but if they’ve been to my channel on YouTube or read any of my stuff, they’re cognizant of the fact that they go to work every day which commands a wage or a salary and they’re investing their capital which demands a return. If you cannot get an adequate return from a business purchase and you’re not going to get an adequate wage, then you should leave your money in the bank and go find a job. It doesn’t make sense to put yourself in that risk position if it doesn’t make sense. That is something that a lot of the sellers have a hard time with because from their perspective, they’ll say, “I didn’t have all those guarantees of cashflow when I got into it.” They’re different. They’re entrepreneurs versus investors is the way I often put it.
Who would you say is usually a little bit more skilled? When you bring two parties like this together, you’ve got a seller who has these big dreams, like you just hit on a certain expectation. You’ve got buyers, it’s my assessment, how I view who’s more sophisticated, who’s more savvy, more experienced usually in the relationship coming together, what’s your assessment between those two?
The seller knows the business better. The buyer is usually more generally sophisticated from a business point of view and here’s why. The buyer is usually coming out of some middle management function at a larger enterprise. They’ve had an income which has allowed them to accumulate savings and wealth either through their home, equity appreciating or something. They come from an environment where they understand processes, procedures, creating systems, writing things down. A lot of the times, that book The E-Myth by Michael Gerber, he talks about this in his book. That technician, that person who knows how to do a trade, like the tire guy, he starts to tire shop, he can only grow so big because he’s not implementing most of the time those systems that he needs. He gets maxed out with his mental bandwidth and the buyer will come along, maybe it’s a person from a big organization or maybe a military person and they’ll understand how to put systems in place.
What differentiates a small business from a big business a lot of the time is that small business owners will delegate tasks to employees like you go fix the brakes on that car, whereas in large businesses we delegate responsibility. You are in charge of the battery inventory. I want you to figure out a system to make sure we never run out of batteries. When you delegate the responsibility, you free up mental bandwidth in the owner’s mind, now we can focus on something new and different to try to grow and improve the business.
That is such good advice
and also probably why it’s great to have a guide and an advisor like you. For someone who hasn’t been through it before either buying or selling or hasn’t especially been through it’s selling a company, having gone through it a couple times on both sides, I can just say that having an advocate, somebody who has that experiences is priceless. I’d love to spend hours with you frankly, and I know you’ve got all kinds of great resources that I’ve even started to tap into because I find this topic fascinating. Where can people go to get more of you, learn more about your processes, how to do this either on the buying side or the selling side, etc.
If you go over to my blog site, DavidCBarnett.com, that’s the central nervous place for everything that I do is my blog site. From there, you’re going to find hundreds of articles. There are hundreds of YouTube videos. There are playlists. I ripped the audio and put it onto iTunes as well. There’s a website specifically for people that want to buy and for those who want to sell. I’ve got some online courses and things that people can check out, but DavidCBarnett.com is a place where you can access all of that stuff.
If you’d like to have an advocate in your corner to help set you up to exit, to sell or to buy a business or many businesses for that matter, then I’d encourage you to go deeper with David and his material. Dave, what were you known for in high school?
I was one of those quiet guys who would be reading and stuff. When I went to university I thought it was great because suddenly I was surrounded by what I believed were my people, people who could read. I’ve always been interested in business. Growing up in Canada, I would shovel my neighbor’s driveways in the winter time and mow their lawns in the summertime. Even in the university, I signed a licensing deal with my university to use their coat of arms on the Zippo lighter.
This was back in the ‘90s when more people were smoking. I’ve always had my eye out for a way to turn a buck, to make some money, to satisfy some demand. I always tell people that I’m really fortunate because my hobby and my business are the same, which I think is probably the same for you. I’m just interested and excited about business, learning about other people’s experiences and just absorbing as much as I can and in turn, sharing that back with people to help them learn.
What’s something that most people don’t know about you?
When I was in college, I was a late-night college radio DJ. I never realized that that skill would come in handy until I started appearing on podcasts.
What’s something deeper than that that most people don’t know about you?
When I was growing up, my parents were a little bit older than other people’s parents. I’m in my early 40s, my dad just turned 80. He grew up in a just post-depression household and it was all about saving and conserving and being wise with money. When I was growing up, we had a really large garden and every fall we used to do canning and preserving, making jams, jellies, pickles, and I continue that now. I made 24 liters of salsa. I made about 30 liters of pickles, a whole bunch of jam. It’s something that I enjoy because it helps me feel connected with my parents’ generation, but also it helps me control what goes into my mouth and what goes into my kids’ diet. It’s something I don’t often talk about, but just being aware and having an understanding of where your food comes from and getting your hands dirty and getting involved in that part of things, I think it’s really important. I think it helps connect us to our humanity.
How old are your kids?
They’re nine and ten.
I don’t mean to put you on the spot with this, but would you say would be a value or set of values that you hope to instill in your kids?
I’ve been working a lot to teach them to negotiate. I try not to have a household of rules. I tried to have a household of policies. When kids ask for something, I try not to just say no, I try to let them come to me with arguments about how we can work and why it might make sense. They go to public school and in the school system we’re taught, if somebody bothers you, you go to the teacher. This constant looking for solutions outside of yourself and referring to greater authority, I don’t think that’s helpful because what ends up happening is you get into the real world, you either join the army or become a civil servant.
In which case, you’re still in that system. If you’re going to join the rest of us in the free market and be in business, you have to learn how to negotiate and present something of value and convince someone how it’s going to work for both of you to agree with your plan. That all comes down to sales and negotiation, and those are the skills that are going to help them get ahead. Those are the types of things I try to foster here in the house.
Everyone, if you want to go deeper with what Dave’s been sharing with you, I want to encourage you to go over to DavidCBarnett.com. You can learn about buying, you can learn about selling, you can learn about growing your business. He’s got all kinds of amazing content in all places that make it easy for you, most importantly, to get access to these tools and resources. I just want to give you a quick summary of some of the things that you can take action with now. Focus on the roles people play in a business exchange even if you’re just building up your business. Are you thinking of your business in terms of a manager hat or are you wearing the investor hat? You need to look at both hats as it relates. When you go into an exchange with somebody, are you dealing with a reasonable buyer, reasonable seller, unreasonable buyer, unreasonable seller, because many times if you overprice it, they’re going to make assumptions about which one of those four categories you might be in.
There are a couple key components, cashflow. When people are taking over the management of the business, what systems do you have in place? What kind of processes do you have in place? You want to make it as easy for that client to buy it. Think of the buyer, not as some outreach person. Think of them as your potential clients. When you think of a client, the definition of client is someone who’s a custodian or steward or someone supporting someone in a relationship. If you think of them as a customer, that means it’s transactional. You can go look that up in the dictionary, the difference between client and customer. It’s a huge difference. Set up your terms for your client. Look at them that way. Make it easier for them. There’s a big difference between delegating tasks and delegating responsibility and rule your household, rule your business with policy, not rules and learn to negotiate. What other action steps, Dave, would you hope that people would take from our session together?
If they’re interested in learning more, come on over to the website. The other big feather in my cap was my winter project is I got all seven of my titles that are on Amazon converted over to audio book. They’re on audible, iTunes and Amazon as audio downloads.
Thanks for making us part of your day. Make it a great week. We’ll see you next time.
Resources mentioned on this episode:
- Dave Barnett
- Franchise Warnings
- How to Sell my Own Business
- Invest Local
- Dean Graziosi
- The E-Myth
- Dave Barnett’s YouTube
- Dave Barnett on iTunes
- Dave Barnett’s online courses
- Dave Barnett on Amazon
About David Barnett
David has been working with small and medium-sized businesses for over 20 years in marketing and finance. He’s the author of several small business and investing books including three best-sellers; Invest Local, Franchise Warnings and How To Sell My Own Business. He’s been a finance broker helping businesses to grow and a business broker helping business owners with their exit. Today, David works with business people around the world helping them through the process of buying and selling companies on their own.