Saturday, February 15, 2025

Selling Your Business to an Employee: Is It a Smart Move?

 When it’s time to sell your small business, one of the biggest questions is whether selling to a long-time employee is a good idea. At first glance, it makes sense—they already understand the business, know the customers, and are familiar with daily operations. However, the reality is more complex. https://www.youtube.com/watch?v=ODZF3gTeETc 

In this blog, we’ll explore the pros and cons of selling your business to an employee and discuss better alternatives to ensure a successful transition.

The Difference Between Small and Mid-Sized Businesses

In larger businesses with structured management, employees often have clear roles, make decisions, and manage teams. These individuals may have the skills and mindset needed to transition into ownership.

However, in most small businesses, the owner retains control over all critical decisions. Employees, even those with managerial titles, may primarily focus on completing tasks rather than developing strategic vision or taking full responsibility. This lack of entrepreneurial experience can make it difficult for them to succeed as business owners.

The Risks of Selling to an Employee

From experience, I’ve seen multiple cases where business owners sold to long-time employees who later struggled and failed. The key issue? These employees lacked the core traits of a successful entrepreneur, including:

  • Decision-Making Ability – Business owners must make high-stakes decisions regularly.

  • Responsibility & Stress Management – The role comes with financial and operational pressures.

  • Ambition & Drive – Successful entrepreneurs have a strong desire to achieve and grow.

Many employees thrive under direction but struggle when placed in the role of an owner, where they must drive the business forward.

A Better Alternative: Consider Past Employees

Instead of selling to a current employee who may lack entrepreneurial ambition, consider reaching out to past employees who left the company for greater opportunities. These individuals already know the business but demonstrated ambition by seeking new challenges.

A former employee who moved on, gained more experience, and built financial stability may now be in a position where buying your business is an attractive opportunity.

Finding the Right Buyer for Your Business

If you’re considering selling, take the time to evaluate potential buyers beyond just convenience. Selling to an unprepared buyer can lead to failure, impacting your legacy and the long-term success of the business. Instead, look for individuals with a strong entrepreneurial mindset, whether they are former employees, industry professionals, or external buyers.

Ready to Sell? Get Expert Guidance

If you’re thinking about selling your business, visit my website for valuable resources, including “12 Things to Do Before You Consider Selling Your Business.” (FREE to email list subscribers) You’ll gain insights into preparing your business for sale, finding the right buyer, and ensuring a smooth transition.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com and receive 7 FREE gifts to help you on your journey!


Wednesday, February 12, 2025

Exceptional Customer Service and Getting 5 star reviews

 

***New Video Alert!

You want more 5-star reviews for your business?

You need a delivery process that you can work on.

It’s an extension of your marketing funnel as it’s all about setting customer expectations.

I give you some thoughts about how to work on this in this week’s video.

Check it out right here: https://youtu.be/7Z0hK4sNM5k 

Cheers


See you over on YouTube

David C Barnett


Monday, February 10, 2025

PREMIERE- Mike Finger- Online small biz value calculators

 Can you learn the value of your business online FREE?

New Video Premier interview guest- Mike Finger.

I’m happy to have Mike join me again on a live broadcast.

Mike works with business owners and helps them get their business ready for sale.

And- he knows what he’s doing because he’s sold four of his own businesses.

Tune in and as we’ll be discussing online business value calculators.

This is a ‘must see event’ for business owners who want an idea of what their business is worth.

Be sure to join the premier live so that you can ask questions, replay will be available.

Set yourself a reminder on YouTube here: https://youtu.be/hap_hJV78Ro 


We’ll be going live Monday February 10, 2025 at 1PM Atlantic Time and 12 Noon Eastern Time

See you there!

David C Barnett


Saturday, February 8, 2025

Demystifying Leveraged Buyouts (LBOs): Can You Buy a Business with No Money?

 This week, I’m addressing a thought-provoking question from my viewer, who commented on one of my YouTube videos about buying a business with no money. He believes that anyone with some brains can structure a deal without using their own money—otherwise, leveraged buyouts (LBOs) wouldn’t exist. So, let’s dive into the mechanics of LBOs and discuss whether it’s truly possible for someone with no money to pull this off. https://youtu.be/UrBLOtRY0OI


What Is a Leveraged Buyout?

A leveraged buyout (LBO) is a financial strategy where a buyer acquires a business using borrowed money, with the target company’s assets serving as collateral for the loan. This concept gained widespread attention in the 1980s, thanks to high-profile deals and books like Barbarians at the Gate.

In simpler terms, it’s like financing the purchase of a car: you borrow money to buy the car, and the lender secures a lien on the vehicle in case you default on the loan. In an LBO, the business being purchased effectively finances its own acquisition through its assets.

How Does an LBO Work?

Here’s a step-by-step breakdown of how an LBO deal is typically structured:

  1. The Buyer Sets Up a Purchasing Entity: The buyer creates a new company (let’s call it BuyCo) specifically for this transaction.

  2. Assessing the Target Company’s Assets: The target company (SellCo) owns valuable assets such as land, receivables, inventory, and equipment. These assets are evaluated for their collateral value.

  3. Securing a Loan: The buyer approaches a bank or lender and requests a loan to finance the acquisition. The lender agrees to provide the loan, but only on the condition that they receive a lien on SellCo’s assets post-acquisition.

  4. The Merger: To secure the loan, BuyCo and SellCo must merge into a single entity (NewCo). This ensures that NewCo owns the assets and is simultaneously responsible for the loan.

  5. Closing the Deal: At closing, the bank disburses funds to the seller via a lawyer. Simultaneously, NewCo grants the lender a lien on the assets. This complex process involves meticulous legal coordination to ensure everything happens simultaneously.

Challenges with LBOs for Individuals with No Money

While LBOs are a powerful tool, they are not easy for someone with no financial resources to execute. Here’s why:

  1. Banks Rarely Finance 100%: Lenders typically don’t loan the full value of the target company’s assets. They account for risks by limiting the loan-to-value ratio, often requiring additional equity or subordinated debt.

  2. Legal and Transaction Costs: Even a modest LBO can rack up significant legal fees. For instance, a $1 million deal I was involved in incurred over $10,000 in legal costs due to the intricate paperwork and coordination required.

  3. Vendor Financing: Many LBO deals rely on seller financing or equity participation. Sellers may accept a note or shares in the new entity, but this still requires negotiation and often some upfront capital.

  4. Strong Buyer Financials: Banks often consider the financial strength of the buyer’s existing company (BuyCo). If BuyCo has no assets or cash flow, securing the loan becomes far more difficult.

Can a Person Truly Buy a Business with No Money?

In my previous video, I addressed whether someone who is flat broke could buy a business using 100% borrowed money. The answer, in short, is that it’s highly improbable. LBOs work best for larger businesses with valuable assets and a financially strong buyer. For smaller deals or individuals with no resources, alternative strategies like equity partnerships or creative financing may be more realistic.

Final Thoughts

Leveraged buyouts are fascinating and effective for larger companies with significant assets. However, they require careful planning, strong financials, and expert legal guidance. For those interested in learning more about LBOs and other acquisition strategies, I encourage you to explore my online course on buying a business. It’s a comprehensive, self-paced program featuring videos, workbooks, and updates to keep you informed.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com and receive 7 FREE gifts.

Cheers!

David C Barnett


Wednesday, February 5, 2025

SmallBiz Exit Price Trap


***New Video Alert!

Tim is making an offer on a business and needs the seller to stick around for a year of training.

Where does the money come from for his salary?

Tim needs a salary too.

Cash flow conundrum. 

I’ll tell you your options and how you need to think about this scenario.

Check it out right here: https://youtu.be/rVi484Syae4 

Cheers


See you over on YouTube

David C Barnett



Saturday, February 1, 2025

Avoiding Costly Mistakes: Understanding Double Counting Income When Buying a Business

 When buying a business, one of the biggest concerns is accurately evaluating its cash flow. Imagine thinking you’re buying a business with a cash flow of $200,000, only to realize later it’s only half of that. This mistake could be disastrous. In this post, we’ll delve into the common problem of double counting income, why it happens, and how to avoid it. https://youtu.be/64KgCW9I0wo


The Importance of Cash Flow in Business Valuation

Cash flow is the lifeblood of any small business. When buying a business, what you’re really buying is its cash flow, which determines its value. Accurate accounting and financial statements are critical in ensuring that you’re paying a fair price for the business.

Understanding Income Statements and Balance Sheets

To avoid falling into the trap of double counting income, it’s essential to have a basic understanding of two key financial documents:

  1. Income Statement: This report shows a business's profitability over a specific period. Here’s an example:

    • Sales: $100,000

    • Cost of Goods Sold (COGS): $50,000

    • Gross Profit: $50,000

    • Overheads: $30,000

    • Net Income: $20,000

  2. Balance Sheet: This is a snapshot of a business’s financial position at a given point in time. It includes:

    • Assets (what the business owns)

    • Liabilities (what the business owes)

    • Equity (the owner’s stake in the business)

The balance sheet always balances: Assets = Liabilities + Equity. The equity section often includes retained earnings and net income from the income statement.

The Problem: Double Counting Income

Double counting income typically happens when buyers misunderstand where money is coming from on the financial statements. Here’s how it can occur:

  • A business owner takes money out of the business as dividends (recorded on the balance sheet under equity).

  • The buyer sees the net income on the income statement and adds the dividends to it, mistakenly treating it as additional income.

In reality, the dividends are just the owner’s way of withdrawing net income that already exists on the income statement. Adding it back inflates the perceived cash flow and leads to overvaluing the business.

Real-Life Examples

In two recent cases I encountered, buyers fell into this trap:

  • They asked the sellers how much money they took out of the business.

  • Sellers mentioned amounts withdrawn as dividends.

  • Buyers mistakenly added these amounts to the net income, effectively counting the same money twice.

The result? The buyers believed the businesses had significantly higher discretionary cash flow than they actually did, risking gross overpayment.

How to Avoid Double Counting Income

  1. Understand the Financial Statements: Know how the income statement and balance sheet interact. Dividends and net income are not separate streams of cash flow.

  2. Ask Specific Questions: When evaluating a business, ask where the seller’s withdrawals are recorded. Are they part of overheads, COGS, or equity (dividends)?

  3. Work with Professionals: Engage an experienced accountant or business advisor who understands small business transactions to help analyze the financials.

  4. Verify Adjustments: Ensure that any add-backs or adjustments to net income are valid and not simply a redistribution of the same money.

Resources for Learning and Guidance

If you’re navigating the complexities of buying a business, I offer resources and guidance to help you avoid costly mistakes. Visit www.BusinessBuyerAdvantage.com to learn more.

Conclusion

Double counting income is a common but avoidable error that can have significant financial consequences when buying a business. By understanding financial statements, asking the right questions, and seeking expert advice, you can ensure an accurate evaluation of the business’s cash flow.

If you’ve found this information helpful, please like and share this post. For more tips and insights on local investing, business buying, and financial management, visit my blog at DavidCBarnett.com 

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com and receive 7 FREE gifts.

Cheers!

David C Barnett


Friday, January 31, 2025

A Great Interview with Lauren Feldman from 21 Hats podcast

 The Tricky Business of Selling Small Businesses


About the Show: 

This week, in episode 231, special guest David Barnett, who started helping owners buy and sell businesses in 2008, offers some guidance on an often-misunderstood sales process. Early on, David was a business broker. “I sold over three dozen companies for other people,” he tells us, “and it was very interesting and exciting. It was also a terrible business.” So he changed business models but has continued to do pretty much the same work. 

As a result, he’s amassed a lot of first-hand knowledge, much of which he shares in our conversation, including: why many owners fail to think of their business as an asset, why sellers shouldn’t be too quick to reject earnouts, why buyers should consider making multiple offers for the same business, how buyers can protect against the post-purchase loss of important customers, why businesses are selling for less than they were a couple of years ago, why there may be a smarter way to buy a business than by scouring business-for-sale websites, and why there really isn’t a true market for buying and selling small businesses.

Wednesday, January 29, 2025

Funding Transitional Seller Salaries

 

***New Video Alert!

Tim is making an offer on a business and needs the seller to stick around for a year of training.

Where does the money come from for his salary?

Tim needs a salary too.

Cash flow conundrum. 

I’ll tell you your options and how you need to think about this scenario.

Check it out right here: https://youtu.be/KID93MAaq8I 

Cheers


See you over on YouTube

David C Barnett


Tuesday, January 28, 2025

A fantastic Interview with the Humans of Flippa Flippa Podcast

 Join us for an insightful conversation with David Barnett, M&A advisor and author, as he shares his expertise on small business valuation, acquisitions, and common pitfalls to avoid. Learn why most small businesses don't sell, how to properly value a business, and what it really takes to succeed as a business buyer.


Key Takeaways:

*Understanding the difference between hobbies, jobs, and true businesses
*How to evaluate business seller's discretionary earnings (SDE)
*Why passion alone isn't enough for business success
*Common valuation mistakes and misconceptions
*The importance of business experience before acquisition
*How to know when you're ready to buy a business
*Understanding working capital requirements

Whether you're considering buying your first business or preparing to sell, discover practical insights from David's decades of experience helping entrepreneurs make smarter acquisition decisions.



Monday, January 27, 2025

PREMIER- Neal Isaacs Listing to Legacy

 


Listings to Legacy

New Video Premier interview guest- Neal Isaacs

I’m happy to have Neal join me on a live broadcast.

Neal is a business broker in Raleigh, NC and has sold dozens of businesses.

Tune in and as we’ll be going through a bunch of business for sale listings and giving our advice to the sellers.

This is a ‘must see event’ for anyone who wants to sell a business one day and buyers who want to hear about what we see in some of these deals that might not be obvious.

Be sure to join the premier live so that you can ask questions, replay will be available.

I will be in the comments for the premiere.

Set yourself a reminder on YouTube here: https://youtu.be/FbohMhvkw4Y 

See you there!

David C Barnett

Saturday, January 25, 2025

Understanding Security Registries: Protecting Your Collateral in Lending Deals

 When lending money, especially in private transactions, ensuring that the collateral offered is secure and legitimate is critical. One common concern is this: What prevents a borrower from using the same collateral to secure multiple loans? The answer lies in security registries, which serve as public records to prevent such issues. https://youtu.be/MeFAmvf6veE


In this article, we’ll explore what security registries are, why they matter, and how they streamline the lending process, while also offering practical tips for lenders and buyers.

What Are Security Registries?

A security registry allows lenders to register their claim against a borrower’s collateral, making it publicly known. This prevents the borrower from pledging the same asset to multiple lenders. Originally developed for real estate, these registries have evolved to cover movable assets like vehicles, machinery, and even business inventory.

For instance:

  • In the United States, the Uniform Commercial Code (UCC) provides a framework for registering personal property as collateral.

  • In Canada, the Personal Property Security Registry (PPSR) fulfills a similar role.

  • Globally, comparable systems ensure transparency, simplify the lending process, and reduce the risk of disputes.

Key Features of Security Registries:

  1. Public Access: They allow anyone to check if an asset is already claimed.

  2. Legal Protection: Registered claims ensure lenders’ rights to recover their loans during defaults or bankruptcies.

Why Security Registries Matter

Without security registries, multiple lenders could unknowingly accept the same collateral, leading to complex legal disputes if the borrower defaults. A registered claim offers:

  • Transparency: Lenders and buyers can verify whether an asset has existing claims before proceeding.

  • Priority Rights: A lender’s claim is prioritized based on registration date, offering a fair mechanism for asset recovery.

For example:

  • In some jurisdictions, when lending against a vehicle, lenders might hold the vehicle title or list their claim in a registry.

  • Others file a lien, ensuring that their claim remains even if the borrower sells the vehicle, protecting their rights.

Streamlining the Registration Process

Filing collateral claims can sometimes be a complex and costly process, especially for unique assets like:

  • Mobile homes

  • Business equipment

  • Specialized machinery

To reduce complexity and expense, consider these tips:

  1. Prepare Clear Instructions: Provide your legal team with a detailed list of what needs to be registered. This reduces back-and-forth communication, saving time and legal fees.

  2. Include Costs in Loan Agreements: Ensure that the borrower is responsible for covering legal and registration costs as part of the loan terms.

By simplifying the process, lenders can better protect their investments while minimizing administrative burdens.

A Crucial Tip for Buyers

If you’re buying used equipment, vehicles, or other movable assets, conducting a lien check through the appropriate registry is essential. This helps you verify whether any outstanding loans are tied to the asset. Failure to do so could lead to unexpected disputes or financial losses after your purchase.

How to Perform a Lien Check:

  1. Identify the relevant registry for the asset’s jurisdiction.

  2. Search for the asset’s unique identifier, such as a Vehicle Identification Number (VIN) or serial number.

  3. Verify that no active claims exist before proceeding with the transaction.

  4. It’s easiest if you have a qualified lawyer or paralegal help with this.

Final Thoughts

Security registries are indispensable tools for both private lenders and borrowers, ensuring transparency, trust, and legal protection in lending transactions. Whether you’re lending against a car, machinery, or other personal property, understanding the rules in your jurisdiction is critical to avoiding legal headaches and financial losses.

Don’t forget to join my email list for updates and exclusive resources—plus, receive 7 FREE gifts when you sign up today! Visit: DavidCBarnettList.com.