🤑 Biz Buying = Passive Wealth?

It seems like business buying is all the rage these days. Codie Sanchez, Alex Hormozi, Grant Cardone, and so many others are talking about buying businesses in all their content. Perhaps it's just the algorithms showing me what they think I'd like to watch.

Whatever the reason, it seems everyone is discussing it. I don't want to be a Debbie Downer, but I feel compelled to provide some perspective.

Last week, I conversed with someone about this. I believe it's an incredibly valuable way to get into business, but it also presents a massive opportunity to go bankrupt.

#1) Odds are you're going to fail

You might hear claims like "get seller financing, put no money down. The business pays for itself."

While these propositions sound fantastic in theory, based on my experience, the first time you undertake something, you're likely to fail.

Especially if you've never run or built a business before or haven't worked at high-level business consultancy firms like PwC, Bain, or Goldman. You might not necessarily fail, but the odds aren't in your favor.

Knowing this can better prepare you. It helps to understand how to de-risk the business buying process. Always run a worst-case scenario analysis. If that happens, would you lose everything? If you're unsure of the potential pitfalls, it's crucial to find someone experienced in the field. Your objective should be to learn from their mistakes.

Key Takeaway: Seek an experienced business buyer as a mentor. Their insights and experiences can be invaluable. The more people you can bring into your network, the better.

#2) Due Diligence Matters

I don't care whether you are buying a piece of real estate, a car, or a business; I believe due diligence matters a great deal. The reason is that it's challenging to correct any fatal flaws that might be present. Without thoroughly inspecting those elements, you won't know if you're set up for failure before you even begin.

The assumption might be that if the business already exists, it couldn't possibly have an inherent flaw that might lead to bankruptcy. However, I beg to differ. The business never had to bear the cost of its purchase before. So, unless you're paying cash for the business, it now has the burden of debt for its purchase.

To put this in perspective for those in real estate: Imagine a rental property without a mortgage, generating an average profit of $3,000. There might be months with no income, and other months with an income of $6,000. Everything seems fine because there's no mortgage. However, the same principle applies to a business. Sometimes businesses experience cycles where income or profits are sparse, while at other times, all the revenue comes in during a particular season. If you have a monthly loan payment, are you adequately prepared for that as the business owner?

Key Takeaway: Implement a thorough checklist and consult with experts. Checklists ensure you don't overlook critical details that can make or break your investment.

#3) All About the Benjamins (Numbers Matter)

It's one thing to buy a business and another to operate it profitably. Understanding your numbers is essential. This involves not only knowing how to read a balance sheet, income statement, and cash flow statement but also truly understanding how each line item affects the bottom line. If you're not financially astute, consider undergoing training or hiring an accountant to guide you through the intricacies.

I know individuals who purchased businesses without being financially astute, so they partnered with financial experts to assist with due diligence. These experts often also became co-owners to help manage the financials. It's crucial to grasp the financial aspects, but if you're uncertain about them, seek assistance from someone who can help.

Key Takeaway: Either be a financial expert or have one on your team. Many businesses falter due to poor financial management rather than operational shortcomings.

#4) All About the People (Cultural & Operations)

Remember, you're not just purchasing assets and liabilities; you're stepping into an established culture with its unique challenges and opportunities. Ensuring that the company's culture and operational structure align with your vision and management style is crucial. You must be prepared to handle the human element: managing employees, maintaining customer relationships, and perhaps making difficult decisions about structural changes.

I would argue that hiring is among the most critical aspects of many businesses. While you might sidestep some challenges when buying a new business, anticipate potential disruptions, especially in smaller businesses with new ownership. Employees often have deep-rooted ties with the previous owner. Their loyalty might lie with them, leading them to act in ways you deem unacceptable, which the former owner might have overlooked.

Key Takeaway: Engage with employees and establish a clear organizational structure that aligns with your goals.

#5) For the Love of God, Have a Plan

When you acquire a business, it's crucial to identify its competitive advantage—what sets it apart from the competition. Is it a unique product, exceptional customer service, a loyal customer base, or proprietary technology? Recognizing and harnessing this advantage can help maintain and grow the business's market position.

Moreover, merely maintaining the status quo often isn't sufficient. You need a "Buy then Build" approach. This means that after purchasing the business, you should have a clear plan for increasing its value. Perhaps it involves adding a new website and sales team, expanding the product line, entering new markets, leveraging technology, or streamlining operations. The value-add strategy should combine leveraging the existing strengths of the business with identifying areas for growth and improvement.

Also, when conducting your employee interviews, I suggest using that time to ask them how they would improve the business. Avoid being so committed to your business plan that it lacks flexibility. You might discover simple solutions you hadn't considered that could enhance your business plan. Additionally, recognize that employees often have valuable insights. This might be their chance to demonstrate their worth and potentially earn promotions or assume larger roles in the future.

Key Takeaway: Formulate a plan for the business's improvement, but remain adaptable based on your findings during due diligence and interactions with employees.

In Conclusion:

Here are the five key takeaways for your business buying decisions:

1. Find a mentor or a community with experienced business buyers

2. Use a Due Diligence Checklist specific to that business industry with experts

3. Be a financial expert or partner with one

4. Interview employees and have an org chart

5. Have a value-add business plan

Drawing from my experience, these strategies have proven beneficial for many in the business buying realm. While not foolproof, they offer a solid foundation for those eager to join the business buying trend.

Cheers until next week,

Jake