***New Video Alert!
Part 3 of the ‘Get into Business 101’ summer series.
Today, we’re talking team members.
This is something you do before you get into business.
I’ll explain the experts and the not-so-experts that you need to find in your community and online.
Check out this week’s video: https://youtu.be/hA75uMo3cNw
Cheers
See you over on YouTube
David C Barnett
X-Ray the personality of someone before you hire them!
New Livestream guest-> Fletcher Wimbush
I’m happy to have Fletcher join me on a live broadcast.
He’s got over a decade of experience in hiring and talent acquisition and evaluation.
Tune in and as we’ll be discussing DISC assessments in the hiring process and how to properly use them.
This is a ‘must see event’ for anyone who will need to grow their team in the future.
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here:https://youtube.com/live/rApkiUGMW3c
We’ll be going live Monday July 22, 2024 at 1 PM Atlantic Time, 12 Noon Eastern Time
See you there!
David C Barnett
Today, I’m sharing a story about a viewer in Chicago who’s struggling to buy a business with around $500,000 in EBITDA. This tale might just resonate with many of you looking to make a similar move. https://youtu.be/L-muWEy2Y1E
Our Chicago friend, a retired C-level executive with a substantial budget, is looking for a solid business to purchase and grow. However, he’s finding himself constantly outbid by competitors with deeper pockets. Why? It’s all about the magic of the $500K EBITDA mark.
At $500K EBITDA, a business becomes highly attractive to both Private Investment Groups (PIGs) and Private Equity Groups (PEGs). These entities have the resources to transform such businesses into larger, more valuable enterprises. Here’s how they do it:
Target Industry Segmentation: They focus on industries with many independent operators.
Strategic Acquisition: They buy a successful business and pour resources into rebranding and marketing.
Expansion: They acquire similar businesses within the same media market, creating a chain.
Scaling: They grow the business from $500K EBITDA to several million dollars.
Exit Strategy: They sell the aggregated businesses at a much higher multiple or take it public.
Strategic buyers are willing to pay more because they’re not just buying current cash flow—they’re buying future growth potential. They can afford to offer higher prices because:
They can spread marketing and operational costs across multiple businesses.
They’re aiming to sell at higher multiples typical in the stock market (8-15 times earnings) compared to the small business market (3-4 times earnings).
For individual buyers like our Chicago friend, competing against these strategic buyers is tough. Here’s my advice:
Look for Smaller Targets: Focus on businesses just below the $500K EBITDA mark. These are less likely to attract PIGs and PEGs.
Build to Sell: Find a solid business, grow it, and then sell it to a PIG or PEG once it hits that magic EBITDA threshold.
Navigating the business buying landscape can be challenging, especially when competing with well-funded investment groups. However, by adjusting your strategy and targeting slightly smaller businesses, you can find valuable opportunities and potentially sell at a profit in the future. www.DavidCBarnettList.com
Cheers!
David C. Barnett
Join me to this interview with the host of He Said, She Said: Razon Branding Podcast together with Jacci Russo and Michael Russo.
Tune in to learn why business is tough, why it’s important to be realistic about business opportunities, and how to navigate the ever-changing landscape of buying and running a business. Don't miss my practical advice and candid insights that could help you make better business decisions.
***New Video Alert!
Part 2 of the ‘Get into Business 101’ summer series.
Today, we’re talking resources.
Understanding what you’re working with will inform your options.
Money
Debts
Personal Assets
Skills and Experience.
Check out this week’s video: https://youtu.be/8_IiRwZ0bOo
Cheers
See you over on YouTube
David C Barnett
Business Seller’s Journeys with Business Brokers
New Livestream guest-> Neal Isaacs
I’m happy to have Neal join me on a live broadcast.
Neal has sold dozens of businesses in his role as a business broker with VR Business Brokers in Raleigh, NC.
Tune in and as we’ll be discussing what ideally a broker should be telling/showing/helping sellers with and we’ll hear some of his stories from the trenches.
In particular, I’m going to ask Neal about how, as a broker, he views his inventory of businesses for sale.
This is a ‘must see event’ for any small business owner who might want to sell one day.
ESPECIALLY if you want to learn how to spot the tells of a qualified broker vs. a poseur.
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here: https://youtube.com/live/-7vt5Ef-9i8
We’ll be going live NOW! July 15, 2024 at 1PM Atlantic Time and 12 Noon Eastern Time
See you there!
David C Barnett
I was invited by a small business lending website to share my top five tips for small business success. I’ve discussed these in various podcasts and thought it was a great opportunity to compile them all in one place. So, without further ado, here are my five tips for achieving success in your small business: https://youtu.be/hjJUly_MLBQ
Understanding your gross margin is crucial. It’s the foundation of your business’s financial health. I once worked with a craft manufacturer who sold products at fairs and markets. He didn’t realize he was operating in three different business models—manufacturing, distribution, and retail—each with different margin expectations. By breaking down the margins for each level, we found that he was more successful as a manufacturer and distributor than as a retailer. This analysis allowed him to focus on building wholesale accounts rather than retailing, significantly improving his profitability. Always ensure you know the margins you should be achieving and monitor them closely.
Having a robust system for monthly financial reconciliation is essential. One of my clients, who buys and installs products, struggled with margin discrepancies because they only did inventory quarterly. This delay made it hard to track their true cost of goods sold. By implementing a better inventory system, they reduced the time spent on inventory from a full day to just an hour and a half, allowing them to reconcile their books monthly. This timely tracking ensures they stay on top of their margins and make necessary adjustments quickly.
Though debt and equity typically appear on the balance sheet, understanding their impact on your income statement can offer valuable insights. Think of debt as a fixed obligation—like paying an employee a wage, which you owe regardless of their productivity. Conversely, equity, such as a commission-based salesperson, is only compensated when they generate value. By leveraging this concept, you can structure your business to minimize fixed costs and maximize performance-based expenses, enhancing your financial flexibility.
Big companies excel at leveraging other people's capital and resources. For example, instead of purchasing real estate, they often lease to utilize the landlord’s equity. A client of mine wanted to open a second automotive repair location but was concerned about the high equipment costs. I suggested they lease a nearby space and use it for estimates and customer service, while performing repairs at the original location. This approach allowed them to expand without a significant upfront investment and minimize their risk if the new location didn’t succeed. Always look for creative ways to achieve your goals with less capital.
Knowing what drives your customers to choose your business is vital. Back in my corporate days, I encountered a small-town restaurant that didn’t accept American Express. As a result, I had to go through a cumbersome expense process, which discouraged me from returning. The restaurant owner likely focused on food quality and cleanliness, but overlooked the inconvenience caused to customers by not accepting certain payment methods. Always consider the entire customer experience, from their perspective, to remove barriers that might deter them from choosing your business.
I hope you find these tips helpful. If you enjoyed this, make sure you join my list so you’ll never miss any of my new content online: www.DavidCBarnettList.com
Cheers!
David C Barnett
***New Video Alert!
If you’re going to be in business for the long term and grow, you need customers who think highly of you.
This means they’ll refer you and buy again.
But you’ll never have this if you lack this one crucial element… Integrity.
I’ll show you how to maintain it in this week’s video: https://youtu.be/hR-y5ceSjB0
Cheers
See you over on YouTube
David C Barnett
Today’s question comes from Jolson, who is negotiating to buy a cash-heavy business like a laundromat or dry cleaner where the seller doesn’t report all the income. Jolson wants to know how to make an adequate presentation to the bank to get a loan for this business, given the incomplete financial records. https://www.youtube.com/watch?v=8pVgc2u07pU
First off, Jolson, you’re facing a common issue in cash-heavy businesses. Owners sometimes pocket part of the revenue without declaring it, aiming to reduce their tax liabilities. This practice, while not recommended, does happen. The challenge for buyers like you is that the financial statements don't accurately reflect the business’s true income, making it difficult to secure traditional bank financing.
You’re correct in assuming that banks rely heavily on accurate financial statements to assess the viability of a loan. When the reported income is incomplete, the business appears less profitable and riskier, making it "unbankable." In this scenario, presenting these financials to the bank is not an option because the bank will likely reject the loan application.
While traditional financing may be off the table, you can still make a deal to buy the business. The key is vendor financing. Here’s how it works:
Negotiation: Explain to the seller that their practice of underreporting income makes it impossible for you to secure a bank loan. This is a critical realization for the seller to understand that all potential buyers will face the same hurdle.
Vendor Take-Back (VTB) Financing: Propose a deal where the seller finances a significant portion of the purchase price. This means the seller loans you the money to buy the business, and you pay them back over time.
Sales Warranties and Protections: To protect yourself, structure the deal with sales warranties. This ensures that if the seller’s claims about the unreported income are false, you have recourse. For example, you could adjust the purchase price if the actual income doesn’t match the seller’s assertions.
I’ve helped clients in similar situations. For instance, a client purchased a pizzeria where the owner was pocketing cash receipts. We used vendor take-back financing combined with sales warranties to protect the buyer. This approach provided confidence in the transaction and safeguarded the buyer’s interests without needing to rely on court actions.
Once you own the business, I highly recommend operating it transparently and legally. Declaring all income not only ensures compliance with tax laws but also provides accurate financial records that can be invaluable if you decide to sell the business in the future.
Jolson, buying a cash-heavy business with unreported income is challenging but not impossible. Vendor financing offers a viable solution, allowing you to negotiate a fair deal while protecting your investment. For a deeper dive into buying businesses and structuring deals, consider taking my online course, Business Buyer Advantage. It’s a comprehensive guide that has helped hundreds of people and offers a 30-day money-back guarantee.
If you have further questions or need personalized advice, feel free to book a session with me.
Many clients have found it extremely helpful, and you can read their reviews on the site.
Thanks for your question, Jolson, and good luck with your business purchase! Don’t forget to subscribe to my email list at www.DavidCBarnettList.com
Cheers
***New Video Alert!
A client wants to know how to let one small business seller know that he has to wait while he pursues another deal which may be better.
Is this wise?
How do you do it?
The client is missing this one critical factor in his thoughts on managing multiple opportunities.
I’ll walk you through it in this week’s video: https://youtu.be/oudlAM502F0
Cheers
See you over on YouTube
David C Barnett
Today, I have an interesting question from Eugene: “Doesn’t having business debt make a business more volatile?” Let’s dive in. https://youtu.be/YH8WzjkDU-A
Eugene's assumption is understandable but not entirely accurate. Having debt in a business does not inherently make it more volatile. However, the key issue is how that debt interacts with the business’s cash flow and overall stability.
Debt can be a useful tool for a business with steady and predictable cash flow. Here’s why:
Boosts Return on Equity: Debt can amplify the returns for equity investors. If you demand a high return on your investment, using debt can enhance those returns. For example, borrowing at an interest rate of 5-6% can be significantly cheaper compared to the return you might expect on your equity investment.
Fixed Payments: With debt, the business commits to regular payments. If the business has a steady cash flow, it can manage these payments without issues, making the use of debt advantageous for growth and expansion.
While debt doesn't make a business volatile, volatile businesses should generally avoid debt. Here’s why:
Unpredictable Cash Flow: Volatile businesses often experience fluctuations in revenue due to factors like seasonality, market conditions, or economic shifts. This unpredictability can make it challenging to meet regular debt obligations.
Risk of Default: If a volatile business cannot meet its debt payments during a downturn, it risks defaulting on the loan, which can lead to severe financial consequences, including bankruptcy.
In volatile or high-risk industries, such as IT startups, businesses often seek equity financing rather than debt. Equity investors share in the risk and don’t require fixed payments, making this a more flexible option for businesses with uncertain futures.
One scenario where startups might acquire debt is through government guarantees. These programs enable new businesses to borrow based on projections, despite lacking a proven track record. While this can provide initial capital, it also increases the risk if the business cannot generate the projected cash flow.
So, Eugene, the answer to your question is nuanced. Debt doesn’t inherently increase a business's volatility, but volatile businesses should be cautious about taking on debt. For businesses with steady cash flows, debt can be a strategic tool to enhance returns on equity. However, businesses with unpredictable cash flows are better off avoiding debt to prevent financial strain.
For more insights on managing and financing small businesses, make sure to sign up for my email list at www.DavidCBarnettList.com . Subscribers get early access to my videos and special offers on courses and workshops.
