556: Buy the Right Business with David Barnett
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Welcome to the How of Business with your host, Henry Lopez, the podcast that helps you start, run, and grow your small business. And now, here is your host. Welcome to this episode of the How of Business. This is Henry Lopez and my friend and repeat guest, David Barnett is with me again today. Welcome, David.

Henry, have I earned the jacket yet? Is this the fifth time? This is the fifth time. So you do get a jacket. Yes. Awesome. You've gotten to pin before, but now you upgrade to the jacket. Absolutely.

You're a very, very, very rare company, but yes, you are, sir. So David, obviously I've known for a long time. In fact, I was looking it up. You, this is the fifth appearance. In fact, you first were on episode 99. Mind you, I'm on episode 550 now, back in April of 2017, when you were a young man. Yes. It was a while ago. Yep.

I probably wouldn't be recognized by many people though, because I think I've lost a few pounds since then. You look, you look marvelous, but, uh, but no, you've, you've seasoned well, and now you have even more knowledge about buying and selling businesses amongst other things, but that tends to be one of the specialties. And I happen to be looking potentially this year to, to buy another business. So it's, I'm going to be asking these questions for my selfish interest and

But David's going to share his guidance and thoughts and tips. He's got a new book, as you can see in the background. For those of you watching the video, Buying Versus Starting a Business, we're going to chat about that. And so also, if you want to find any of the resources that I have at The Howa Business, including the show notes page for this episode, and to find out more about my one-on-one and group coaching programs, just visit thehowabusiness.com.

I also invite you to please consider supporting this show on Patreon and subscribe wherever you might be listening so you don't miss any new episodes. Let me tell you briefly about David Barnett. David Barnett is an entrepreneur, an author, a speaker, and a consultant specializing in helping people buy and sell businesses. David has been working with small and medium-sized businesses for over 20 years. He has helped entrepreneurs buy, grow, and sell businesses.

And as I mentioned, David is the author of eight books about small business transactions and local investing, including Buying Versus Starting a Small Business and related to

21 stupid things people do when trying to buy a business. I'm going to try to avoid some of those things. He's the host of a very popular YouTube channel, a lot of free information there with hundreds of videos on buying, selling, financing, and managing small and medium-sized businesses. You can find out more at his blog site, David C., as in Charlie, David C. Barnett, with two Ts at the end, davidcbarnett.com.

And so once again, and David lives in Canada, for those who are tracking where people live. And so once again, David Barnett, welcome back to the show. Hey, I'm glad to be here. Thanks so much for having me, Henry. Absolutely, absolutely. So let's get right into it. If anybody wants to learn more about David, go back to episode 99 and we do a deeper dive into his background and entrepreneurial journey, which is fascinating in and of itself. But I'll start with this question related to your book. Why should I consider as a

perspective business owner, maybe it's my first business, maybe it's my second business to buy an existing business versus build. I know that's a big question, but at a high level, get us started. Why should we think that way? So here's the bold statement. It's faster, easier, and cheaper to buy an existing business than it is to start one. And

And, uh, it simply comes down to the fact that when you start a business, you have this unknown in front of you, which is how long is it going to take me to achieve a breakeven point? And in, in a lot of my literature, I talk about, uh, several different qualities of breakeven points. I don't know if you've ever gotten into this, but

There's, you know, a lot of people will start a business and of course in its infancy, the business is new. It doesn't have a lot of cashflow. A lot of people are going to start off. They're not going to take a paycheck, for example. And so the first break even is when the business is actually covering its own bills. Right. And then the second break even is when it's suddenly it's now can afford to pay its owner. Right.

And then I often argue a third break even is when it can actually afford to pay its owner a market wage because often people will take some amount of money out that they can maybe live on, but it's really not paying them as much as they would earn if they were doing the kind of work maybe they're doing for some other more established company as an employee. So there's sort of these three steps.

And we can plot and project when we think that will happen, but we're never sure. There's no degree of certainty. When you buy an existing profitable business, you've already got cash flow and you've got

you know, the product, the service, the systems, you've got employees who understand what they're doing day to day, you know, in their work and you've got that customer base. And there's, there's a, so, so the, the market risks, the sales risks are greatly diminished when you buy a business.

That doesn't mean it's risk-free. There's another whole plethora of other different kinds of risks that many people don't even think about. And this is a big part of the conversations that I have on my YouTube channel and some of the stuff that I talk about when I'm a guest on a show like yours. And the things that people don't think about are, you know, will...

where do the loyalty of those customers reside? Does it reside with the individual who happens to be the owner of the business today? Or is it in fact with the brand? I actually call this the locus of goodwill, determining where the goodwill resides. And for some businesses, the locus of goodwill is in its physical location. So if the business happens to be in an ideal spot or you are the truck stop at the interstate interchange or whatever,

The fact that the business is in that spot, it could go out of business and somebody else could open it up and there are going to be customers who won't even notice. They've always stopped at that place. Where is the goodwill? That's important. The other risk that people often fail to understand is that if you overpay for a business, you

you are simply trading the market risk of not having enough customers for another different kind of risk, which is finance risk. So if you over allocate your cash flow to debt service by having paid too much for the business,

then you're in the same position. Whereas if, for example, if you lose 5% or 10% of the customers, suddenly now you can't pay yourself for a different reason, not because you haven't reached break-even, but because the money you are earning is all going to the bank, right? Right.

And people don't think about that. A lot of people who get into the realm of business acquisition, they start to learn from different people online. They read materials, they take courses, all this kind of thing. And they become very, very, very focused on the deal. And how can I get the deal to happen? How can I become the owner?

And then very few people are actually really thinking about what's truly important, which is what I call the day two problem, which is after you've done the deal on day number two, operating a successful business and creating the cash flow to service all the debts that you've incurred and taken on to do the deal.

Over the course of my career, I've, I've met many different people, you know, who will challenge me on certain things and they'll say, oh, you know, you can do this, you can do that. People will actually hold up examples of deals. I've had brokers give examples of deals, how people have structured quote unquote creative financing. And, and what the person ends up doing is they put themselves into a position often where everything just has to be perfect in the new business and

In order for things to be successful because of the amount of leverage and maybe the amortizations they've agreed to, et cetera. And as you and I know, as experienced business people, it is very rare that a business is executed on an ongoing basis in a perfect way.

Right.

you know, or some other mechanism for making sure that if things aren't exactly perfect, that you're not going to end up in an unfortunate position where you end up working for free. I mean, listen, I've met a lot of people who've bought businesses that end up at certain points working for free, and that's not why you buy the business. Right. All right. So a lot that you've shared there that we're going to unpack a lot of, but this last point I think is interesting that

Essentially, I'm sure you hear it all the time, but often people say, oh, can you do it that way? It's like there are no rules on how you can structure a deal, right? As long as it's legal and there's a lot of leeway there.

But what I'm hearing from you and you've seen is that's a good thing, but it can also be what gets us in trouble sometimes, right? Yeah. Yeah. Sometimes there are guardrails in the deal. So the best example of what I would call a guardrail is if you are using a bank because the bank has their own set of interests. Oh, sure. And the bank is going to create certain- They're going to have some rules that they're going to have to apply. Yeah. Yeah.

that are going to have to, your deal is going to have to fit into. But a lot of small business deals are done without a, you know, quote unquote business acquisition loan. Not to say that there isn't any bank financing at all, but they're not done with, you know, very commonly like an SBA loan.

And when you don't have a business acquisition alone, then those guardrails disappear. And people can get as creative as they want. And to your point, you may find a way to do the deal and pat yourself on the back, but only to learn later that you may not be in the best position. Having said that, that is to me and to you,

one of the many advantages of considering buying a business if you structure it that way because of the flexibility, right? I think just at a high level, again, if we eliminate traditional, an SBA loan, let's say,

When I build something, I have to spend the money up front, right? Depending on what type of business, let's say it's a traditional brick and mortar business. I got to spend that money up front, build it, and then they will hopefully come as you alluded to. When I buy a business, there's an opportunity to defer and delay and arrange it such that I don't have to necessarily come up with all that money up front. And I think that's a huge advantage that I've been able to leverage when I've bought a business before.

Well, okay. But I would, I would challenge your, your, your thought framework there for a little bit, because when you, when you buy a business on the day you become its owner, you, you have bought it and you pay for it on that day. It's just a matter of where you got the resources to do. Well, I mean, but for example, as you know better than I, I may have structured a seller's note. I may have structured a hold back or some period of a chunk of money that gets paid later based on some certain metric and,

All of those things allow me to not have to spend that capital up front in certain situations, right? Yes. You're still on the hook for it. Of course. Of course I am. Yeah. So here's a mental exercise I sometimes challenge people to do. You know, Henry, you're a business owner today. So if we looked at the cash flow of your business and we determined an appropriate valuation multiplier and we said, Henry, here's what we think your business is worth today.

Imagine yourself going and taking a loan for 90% of that amount and then taking that money out of your business.

And now you're going to carry on running your business, but now you have to make the debt payment on that loan. Right. Right. And how does that make you feel? How does that change the way you might make decisions day to day? You know, one of the interesting things that, that I've, you know, gathered from other entrepreneurs that I've dealt with over the course of time is a lot of people who will get into a business either through startup or acquisition and do, you know, what you've just described, you know, take the big bank loan and all that kind of thing.

When they get to the end of that amortization, when they've paid off those loans, and then they operate in that sort of free cash flow period where much more of the money is going down into their pocket, many of them will be faced with opportunities where they could do another acquisition perhaps. Or maybe they need to borrow a lot of money to reinvest in capital assets and things. And a lot of them really hesitate. Mm-hmm.

because they understand what it's been like to live through the period of high leverage with high debt obligations and the personal guarantees and all of the stress that

and anxiety that comes with that scenario. And going into it, when we do an acquisition, we look a lot at what the positives are. And after you live through it, many entrepreneurs have scars and stories I can tell you about the cashflow crisis three years in where all of a sudden they couldn't take a paycheck or they had to borrow against credit cards or they had to do these maneuvers to try to survive.

Many of them do survive, but once they've been through it the first time, they often don't want to do it again. All right. But you there, it seems to me, if I was a person who hadn't owned a business yet, you would be fueling that fear that a lot of people have of looking at debt as always a bad thing. That mindset that we bring from personal finance, which is correct, that typically debt is a bad thing. But speak to me because I know that's not your point of view.

How do you help people make that mind shift to understand that the right amount of leverage, the right ratios of debt are essential? And we do want to continue to leverage debt as much as possible rather than putting our cash in. Well, I guess there's two ways that we want to look at this. And there's the level of leverage. That's number one. And then number two is where do you get the money?

And what people that are new to the space often haven't stopped to consider is that different debts from different sources have different qualities to them. And it's much easier, for example, to owe money to a person or to owe money back to an array of investors you've collected to do a deal than it is maybe to owe money to a bank, which is very unforgiving and very by the rules, etc., etc.,

And so there's a lot more layers to the onion than simply how much I want to borrow. And what I teach, for example, is that in any deal that you're buying a business, you want to have a material amount of seller financing involved.

because the seller financing is the mechanism that we use to hold the seller accountable for all the things that we've been told during the purchase process. And let me interrupt here. Do you, are you still seeing that that is prevalent in, in, or certainly an opportunity in a lot of, if not a majority of the smaller deals out there? In other words, this is still a very common method of financing is the seller financing. Is that what you're seeing?

It's what I'm seeing. And if you talk to attorneys who are doing these small business transactions and working on the paperwork and ask them what percentage of the deals they work on are involving, for example, an SBA loan, they'll give you their own stats. But here's the problem with the internet, Henry.

is that the internet is filled with content and the social media platforms create algorithms that feed you more of what it thinks you want. Right. And so there are people, for example, whose business it is to originate SBA loans and meal bankers and all this kind of thing. And those people are looking for customers. And so they're out on podcasts or talking to people they're, they're creating content. And so if you, if you get into this space and you start listening to different podcasts and things, you're going to hear these stories over and over and

And it's very easy to start to believe that this is what everybody's doing because there's nobody out there trying to sell, for example, the different kinds of deal structures you can do. There's nobody out there trying to market, you know, seller. Well, because, uh, there's no, there's not money. There's no money to be made there brokering a seller financing note. Well, exactly. Right. And so, so, um,

What happens to a lot of people is they will make an offer on a business. Maybe they will go and talk with a lender. And here's the other thing that happens is that let's say you make an offer on a business and you say, I'm going to give you Mr. Seller 60% of the business value price on closing day. And I want you to carry a note for 40%. And you negotiate that. And you think this 40% seller note is going to be great for helping to manage your risk.

And then you go to the banker and the banker's job is to create cash flowing assets for the bank, right? And so the banker looks at the deal, they look at your credit history, et cetera, and they say, why do you want to borrow so little? We'll lend you 90% of this purchase price, right? And it actually undermines the position of the buyer if you agree to that, right? And so I sort of have this idea

love-hate relationship with the SBA? Because in the United States, SBA financing allows a lot higher leverage in business acquisitions than anybody else in the world can get. The sellers know it's available. And so a lot of sellers will then say, I don't want to carry a big seller note because I know you can borrow the money.

assuming that the deal is at the right price and all that kind of stuff. There really are a lot of variables that have to come into place. You have to be the right buyer. The seller has to believe in you and trust that you're going to be qualified to operate the business so that they will be willing to make you a loan to buy their business.

And, you know, they have to be properly motivated. Yeah, absolutely. If they're, you know, if they're not properly motivated, then they're not going to agree to a deal unless they get everything that they want. That's right. That's right. All right. Let me take a turn here. One of the things that I've always been challenged with, so, you know, my business ownership career, my very first business in 1991 was an existing business that I bought.

then bought another one, sold those. Those were the pizza franchise that I was in. Then I bought another salon suite, two salon suite locations, bought those, sold those, sold our car wash businesses that my partner David Begin and I were in, sold the yogurt shop. So I've bought and sold all of them. I'm just thinking how qualified you are to host a show called The How of Business. I know. And still, I do have imposter syndrome like all of us.

So here's my question. I have found it challenging again this turn when I'm looking for a business again, where to find a business to buy. Give me your insights on how I find a business to buy.

Have you heard this rumor going around the internet that there's something called the silver tsunami, all these baby boomers are retiring? I've been listening to this for years now, for years. All kinds of things that the baby boomers are going to do, including their kids don't want their businesses, their businesses for sale. These are great businesses and they can't get them sold. Yeah. So it's largely a marketing line.

Because I can tell you that way back when I first got into business brokerage in 2008, every time I put a good profitable cash flowing business up, especially one that was a business only open Monday to Friday during business hours, within 48 hours, I'd get over a dozen inquiries. Like there has never been a lack of buyers for good businesses. Right.

Now, the ones that aren't good, nobody should buy, right? The fate of the vast majority of small business has always been wind up in closure. Like just, you know, person wants to retire, they shut things down, they wind it up. So there is a constant demand for really great businesses at the right price that make good money. And so the question then is, is how do you position yourself to solve what I call the visibility problem?

So what is that precisely? It's easy for Henry to see businesses. I mean, businesses want to be seen and they advertise to make sure people know that they're there. So Henry, if you decided that you wanted to buy like a machine shop in a given state, a machine shop in Georgia, you could very easily create a list of such businesses by Googling or finding like phone book data or whatever. You're going to be able to find that list very easily.

But those machine shop owners can't look out their window at people walking or driving by and know which ones are interested in buying a machine shop. Right. And so this is why the business brokerage industry exists. So what the business brokers say to that machine shop owner as their value proposition is they say, hey, let me take your business on. I will create a package. I will market it online. I'll use these websites that advertise businesses for sale.

And I will bring these buyers in, I'll solve this problem. And with any luck, I'll be able to present your business in a positive light and attract many of those buyers.

And we can create a competition between the buyers, which can get you a higher price that will justify my commission. That's sort of the business broker value proposition. Sure. So what that means is, is if you as a buyer are going to rely upon what you find on these websites or what you find listed with a business broker, you are in a race with other buyers and you're going to be competing with them. And this means that

you know, yes, you're going to readily see business owners that want to sell. They're motivated. They've listed their business for sale. There's some degree of preparation that's gone into the presentation. Information should have been gathered. There's a lot of reasons why, you know, finding a business with a business broker is going to make things easier for you. The one thing that's probably not going to be essentially, you know, really great for your point of view may be the price.

Because all those buyers are going to be competing. So if you're not going to go down that route, then how are you going to find the business is through a methodology called proprietary search. So the very first step in proprietary search is figuring out what you want. So I gave the example of machine shops in Georgia.

So once you know that's what you want, then you basically have to create some kind of networking campaign to meet the owners of those businesses and let them know that you're interested in buying their business. So you have to solve the visibility problem. And often it's a matter of connecting those people even before, well, before they've decided they're putting their business up for sale, right? Yeah.

almost everyone you ask, you know, I'm interested in buying your business. Would you like to sell it? Almost everyone is going to say, no, I'm not done with it. They're in the midst of running it. They're enjoying the cashflow and they, you know, they're happy, but there's five reasons why small privately controlled businesses tend to go up for sale. And the biggest one is burnout, boredom and fatigue. Right.

So the person becomes mentally disengaged. They're tired of it. They're not interested anymore. If this person had a job they were bored of, they'd go look for a new job, but they own the business. So they need to try to secure some degree of value out of the business before they move on to the next thing, whatever it might be. Then there's the common ones, divorce, poor health, the need to relocate. And then we have retirement.

And, you know, the commonly held belief is that retirement somehow is linked to the age of 65. This comes to us from the world of employment. Right. Exactly. And I can, in the world of entrepreneurship, as long as people are healthy, happy, and feel that they're enjoying their work.

why would they sell their business? Absolutely. I mean, I aspire to be a business owner of some sort well into as long as I have the mental capacity and until somebody takes the keys away, I'm going to be doing it.

Well, you know, I find that entrepreneurs exit at two different points. So people who have these incredible out-of-the-park grand slam events, like you start the business and it turns into a $100 million thing, right? Right, yeah.

Those people tend to get out in their 50s and then they use that money to enter into some other kind of stage where they become like an angel investor or something like this. Or some passion project or something. Yeah. Yeah.

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The other people who are the vast majority of business owners, you know, who are earning, you know, a good salary, a good profitability out of their business, maybe, you know, 150, 200, 300 grand a year or whatever, you know, that's not really the kind of business you can sell when you're 50 years old and live off of it for the rest of your life.

And so those people I find tend to be in there at least until the end of their 60s, often into their early 70s, until they reach a breaking point where they're just, you know...

they realize that the time in front of them is worth more than the money. Especially if you have, again, a smaller proportion, have gotten your business to where you're not working in your business 70 hours a week, right? If you've managed to build a mature business where you're not there daily, then that's more likely you're going to hang on to that business, right? I want to go back to- And if you're really good at that, you can even keep it a few more years. Exactly, exactly. Part of a portfolio of businesses is,

All right, I want to go back to the thing that I think about, though, is, okay, so that business owner who's already listed, I realize that I'm paying a premium now because I'm buying into a competitive space now where others want it as well, and I'm covering the broker's commission. So all of those things are happening there. But conversely, aren't I when I'm approaching someone who hasn't put it for sale yet, I'm

Isn't there a mentality there? Well, at the right price, meaning the seller's thinking in other words, so aren't I going to pay a premium there to entice that seller, that potential owner to sell?

It depends how disciplined you are as a buyer. So to know what is a good deal for yourself and to look at a business and say, this is what it's worth to me, there is sort of a syndrome that you can initiate when you approach a business owner and say, I'm looking to buy a business like yours, where they think, hey, I've hit the jackpot now. I have got this golden goose that Henry wants to buy.

So you have to know what it's worth to you and you have to stick to your guns. And this is where if you're in a position of compulsion, it's very difficult to do this. A buyer's only leverage in a negotiation to buy a business is the willingness to walk away. Walk away. Yeah. And so is your leverage. That's right. And this is where...

There is a group of people out there. There's a whole sort of a rabbit hole of online content about something called a search fund. And search funds tend to be about people who take on investors to finance a full-time acquisition journey that's typically about two years.

And when these people get to the end of that two-year limit and they haven't found a deal, they're under extreme pressure to get any kind of deal. And that's not the kind of position you want to be in. That's when you make mistakes, right? Yeah. Exactly. And so the solution to that discipline, the way that you maintain the discipline is through deal flow.

So, when you're talking with the business owner and they say, oh, you want my business? Well, I'm willing to sell it for this. And you say, well, you know what? If I'm going to buy a business, I have to pay a price that is going to allow me to draw the necessary salary from my time working in the business. I'm going to have to service debt. I'm going to have to get a return on the

capital that I put in as my down payment. I have to make sure that there's enough cash flow for capital expenditures to replace equipment, et cetera. And so I'm totally willing to get into a deal to pay a reasonable price, but if the price doesn't work for me, I'm not going to do it. If you're serious about moving on and you're motivated and you want to talk about this, we can do that. Right. But I'm not here, you know, to, to have your business at any cost.

And, you know, the way that you're going to have the confidence to say that is by having multiple conversations going at the same time with other business owners. Yeah. And then discipline not to fall in love, or at least not to make it obvious that you've fallen in love with having to have that business. Yeah.

Yeah, exactly. And, and so like I run a coaching program for people that are going through this process. And a lot of the people in that program, they will have these conversations, they'll have these communications with people. 95% of the people they reach out to say they're not interested. And then magically over a 12, 18 month timeframe,

Some of these people that said, no, I'm not interested, all of a sudden start to show back up. Of course they do. Yeah. Because something has changed. You planted that seed. They remember you and something has happened. And now they say, let me give that Henry a call back and discuss. Yeah. But what you're pointing out is it's a numbers game, to put it crudely. You got to make 100 contacts and maybe 10 of them you make offers on. And maybe one of them is a potential opportunity kind of thing, right? Well, do you want to know the sort of...

dirty word that we can use to describe this process. It's sales. Yeah. And I say it's a dirty word because a lot of people don't like the idea of sales. But what you are doing is you are selling an opportunity to exit.

And so just like if you were the sales rep for, you know, the fancy new machine that people might be able to use in a warehouse, you know, if you were going to sell that machine, the new forklift or whatever, you would have to make a list of warehouses. You'd have to go knock on doors. You'd have to find out who makes the decision. You'd have to talk with them about why your forklift is better. And you can just imagine this whole process.

to get to sell some of your machines, right? It's exactly the same here with a proprietary business search. All right. One of your books, 21 Stupid Things People Do When Trying to Buy a Business. As you think back now, because I know you're so good at tracking the data and all of the analytics of it, but what's one or two of those stupid things you saw commonly in 2024 or here recently? Yeah.

Yeah. So, so some of the, some of the common things that, that, you know, stupid things people are doing is they are bringing advisors in who should not be advising people about business acquisition. Like who?

Like their neighbor. Okay. They're, you know, the guy from the church, like, like they'll just look for opinion and counsel from people that they have a high opinion of, you know, they, that they believe are wise, intelligent people, uh, instead of getting people who, for example, have owned a business for 10 years or something like that. Right. Like, like people who have real business backgrounds, right.

One of the things that I like to say is that business acquisition and business operation is a thing that should be done by business people. And business people have business friends, right? Wouldn't you agree? So if you're going to get into this, I believe that people need to go through a period of almost like a...

what do you call it? When, uh, when, uh, the caterpillar turns into a butterfly, you know, metamorphosis, metamorphosis. Yeah. You have to become a business person. And part of that journey is to gain experience in decision-making, um, you know, putting yourself into uncomfortable situations, uh,

When young people ask me, you know, what should I do if I want to buy a business? One of my first responses is look for a job in sales, right? Learn to be rejected, learn to think about problems from the customer's point of view, learn how you create a value proposition that's going to be enticing to the customer because all of those things are going to be directly applicable to every level of business management and ownership. Yeah. And,

Part of that journey is creating friendships with other people and whether it's through something kind of formal, like some kind of mastermind group or something like that, or if it's informal, just the guys you play golf with who are all business owners, you want to create that network of people where

who have been there and done that and understand, you know, what you're getting into that, that is one of the biggest things. I've, I've had to have many conversations with people who were kind of following advice that they got from people who, who really were not business people. Yeah, no, it happens. I mean, it happens ongoing as well. You know, I, I,

I'm smiling at that because as I, and you do as well, as I talk to prospective people who are considering hiring me as their coach, it is interesting how people rely on their friends or family. And they're all well-intended people.

but they don't know how to guide you if they haven't done it before. All right, so getting advice from the wrong people. And the second big thing is overcommitting cash flow to debt service. Okay. And so the way people do this is they don't understand-

everything they're going to have to pay out of the number they're presented. So in the world of small business acquisition, we use a figure called seller's discretionary earnings and it is not profit. People have this idea that the seller's discretionary earnings is the money I get. It's not because out of that STE number, you have to pay yourself a salary, service any debt you've taken on. You've got to pay tax income taxes on, you know, profitable business is going to have a tax bill.

You also have to get some kind of return on the cash you brought into the deal. And you have to have what's called a CapEx budget because the way we get to seller's discretionary earnings is by adding back depreciation and amortization. And that's how we represent the big durable assets wearing out over time. And so people will get into a deal, you know, I've,

I actually had a conversation with someone who wanted to go after a business that had a lot of big trucks and equipment, and they thought it was a great deal because they were looking at it from a multiple EBITDA point of view. And I said to them, like, this business has 30 vehicles. What's the average lifespan of a vehicle? Seven years?

So that means every year this business is buying four vehicles and those purchases come out of the EBITDA. And just like that, Henry, the cashflow evaporated by half.

And, and this, this person was completely unaware of that part of it. And, and, and this is, this is how people trap themselves. Yeah. Yeah. And again, that's a, that's a matter of, that's a person that obviously understandably I would have made the same mistake as ever owned a business, hasn't talked to those things, hasn't had to write those checks. Right. Um,

So, okay. So that's important considering those components of it. You know, we mentioned at the outset, you alluded to it, but I think the biggest mistake I see, I'm sure it's on your list because I know, because I've read the book is buying a business. That's obviously not, it's not even pretend profitable. It's losing money, but I'm confident I can turn it around.

Are you aware of this? And I can't remember the name of it. There's an association of turnaround experts. I think it might be a global or American association. And this is from the world of big business. Of course, yeah. The big guys. And on their website, they are boastful of their success rate. And do you want to know what percentage of businesses they successfully turn around? That's a good question. 25%.

I forget the exact number. It's under 20. It's like 13 or 17. It's somewhere. Wow. And they're like, we successfully turn around one in six businesses. We successfully spend your money to try to turn around one in six businesses. Like, like that. And so,

You know, who should be buying a turnaround opportunity? I'll tell you exactly who. The person who owns and operates six profitable frozen yogurt places could go buy money-losing frozen yogurt places. And absorb that. Now I have experience. Maybe I've done it before. I know the risk that I'm taking. I believe it's going to be accretive to my overall mix of

All of those reasons, that makes sense. But as a first-time business owner, it's, you know. Well, but most importantly, a person who already owns six profitable frozen yogurt shops, if they fail to turn around the seventh, they still have six that are making money for them. Correct. They're not. It's not going to sink their ship. Exactly. Right. All right. Excellent. We've chatted about, you know, your books, but tell us more about what you do these days and who's an ideal business

uh, client, but also consumer of all of your content. Tell us about that. Sure. So anyone who's interested in this whole idea of making business deals, or if you own a business and you're just looking for, um, you know, ways to improve your business ideas about management or growth through acquisition, you know, tune into my YouTube channel, which the audio is put onto a podcast feed too. If you prefer that, you just look for David Barnett, small business anywhere. And, um,

People who are really interested in going down this path, I do have some online education programs. Nobody anywhere should be spending $10,000 with an online course on how to buy a small business.

Um, I've got a program it's over 40 hours long. It's a few hundred dollars. Um, you can learn what you need to know. And most importantly, what, you know, I've gotten from many people who've gone through the course that I offer is that they go through it and they say, wow, I really realized just how unprepared I would be if I actually got into this.

And that journey of self-discovery of learning what is really, you know, your calling or what you would be good at, I think is really important.

I challenge people often, Henry, to ask themselves where the idea of buying a business came from. Right. You know, I've been online creating content for over 10 years. And for the first half of that period, the only people I ever met were people that knew they wanted to be in business. Maybe they explored doing a startup that they may then have evolved and said, you know what? I, I,

It's risky to do a startup. I've got a mortgage. I've got children. Maybe I'll buy a business. And then they would find me online because they were typing questions into the different platforms about business acquisition. But in the last half of the last few years, I'm meeting all these people who are saying, I don't want to miss out on the baby boom retirement. I've heard there's a trillion dollars. The get rich quick opportunity that they don't want. It's the Bitcoin opportunity. It's the FOMO.

Yeah. And, and, and if, if you have been attracted to these conversations because you see something flashy on social media and you think there's quick money to be made and you're going to miss out, I would strongly caution you that you're probably going to get yourself into something that you don't understand. And, you know, this idea as well floating around that you can just put a manager in place and, you know, I, I,

You would have to be someone really without a lot of imagination and thought to fall for that one. And then, you know, people do though. I mean, I see this three routes you can take. People either have enough of the money or can get it because their credit score is good and they get themselves into trouble.

Or there's the other group of people that when they get to this level and they realize, oh boy, this is a lot more complex. This is going to require some work. They bail out. And then I think that leaves the people who will do it the right way and take the time to learn, educate themselves, including with your resources, to then have a higher probability of success. Because none of this is guaranteed. That's the thing with business. There's often people come into it, this group in particular,

is thinking it's foolproof. Well, it's not, right? It's really hard.

Yes, there's no such thing as an automatic business. And even the people I've worked with who bought a business, I'll tell you a path that I've seen be successful. Someone buys a business from an owner operator, the buyer goes in, learns the owner operator's job and role, and then they go and employ some better systematization and tools, workflow tools. They create that handbook for running the business. They do a lot of the things that you talk about on your channel.

And then they're able to hire someone to take over some of those day-to-day management roles and they can kind of step back into this owner role. Now, but here's the thing is, is that there's nothing automatic or passive about the owner role because there are certain things that are never going to be delegated to a manager. Right.

Banking relationships, decisions about big debts, decisions about large capital investments in equipment, buildings, et cetera, renovations. None of these things are ever going to be delegated. The fact is, is that as a business acquirer, you're going to have probably a good chunk of your net worth in the form of a down payment put into the deal. And then you're going to sign a personal guarantee on a bank loan for a much larger sum of money that could represent a total liability of grossing

greater than your net worth, right? Like it's such a huge thing and people realize this is a serious thing. And so you have to develop what I call the regional manager skillset. You have to know the business well enough to know what to keep your eye on so that you can observe what the manager is doing that you put in place. I always draw the analysis or the analogy rather to like Exxon gas stations. You know, each one's got a manager

but that person doesn't run the business for a year and send financial statements to head office. There's a regional person who's kind of looking at key numbers from each location. They're looking at a real time for that matter. And if they see a problem with a given location, they're going to go in and make inquiries and find out what's going on and try to get it back on track. And that's the skill set that an owner has to develop to successfully own a business without being there every day. And again,

Because of the problem of bench depth in small business, meaning you don't have such a deep team. If anything happens to your manager, nine times out of 10, the backup is you. Which means you could, in a moment's notice, be called in to have to go in and try to manage something. And again, we go back to people like, listen, Henry,

People have accidents, people get sick, people fall in love and move across the country. Like all kinds of things can happen to people to all of a sudden make them not available to be your manager anymore. And that's, that's the thing that you have to plan for if you're going to try to pull that off. Right. I could have listened to this episode and thought Henry and David have just convinced me to never come within a hundred yards of starting a business. What do you say to somebody who, who feels that way? Why should somebody say,

buy a business or start a business. It doesn't matter. Go into business ownership. So, you know, if, if you have an interest in business and you have a passion for freedom and responsibility and control, and you want to hold the reins of your own destiny and you are ready to step up and be responsible for the outcomes of the decisions you make and

and you want to shoulder those burdens, I don't think there's another course you can take, another path. And the opportunities are huge. There's an opportunity there for greater control over your time, deciding what you want to do, where you want to go. There's an opportunity to decide how you want to build the business and what you want to push and how far you want to go.

I meet a lot of business owners who are on a constant quest to grow bigger, stronger, more profitable. That's the path that they've chosen. I meet a bunch of other business owners who buy a business, pay down their initial debt. They have a good cash flow and they think, wow, this is exactly what I need to afford to go surfing every Friday or whatever it is that they want to do.

And it plugs into their lifestyle. A business is an asset that provides for you and your family. And what's so fantastic about it is that the way it provides for you and your family is by providing for the wants, needs, or helping solve the problems of your customers. And you voluntarily offer those solutions to your customers. They voluntarily choose to give you money to get those solutions or comforts.

So there's a virtuous relationship between a business and its customer. And by operating it properly and making sure that you are a good steward of that system, that process, you, by extension, get to enjoy a good life. And I think this is why...

business is the foundation of, of free and prosperous societies. Like everything about it is, is good. I mean, if the customers didn't like it, they wouldn't come. If you didn't like the customers, you wouldn't make the offers. If you can't run the business, you'll be out of business and the resources that your business uses will fall into the hands of other people who will run them better. Like it is a, a thing that always encourages better, higher quality, better

et cetera. So if you want to be a part of the success story of the world, business is certainly a way to do it as far as I'm concerned. Yeah. Well said, well said. There's not much I can add to that. I agree completely. And I think that, you know, the only thing I would accentuate is,

the point you make that I think that we, a lot of people, you know, I'm not saying I'm guilty of it as well. Sometimes come into business thinking I'm going to hit that huge home run, right? I'm going to be the next, you know, millionaire, multimillionaire, billionaire. And that's great. That's great. The reality is that for most of us, the small business owners, it's not that I didn't want that, but what I've gotten out of my business is all of those things you identified.

As a perfect example, I had the privilege of, you know, my career before I got full-time into business ownership, I was traveling. I was in sales. I traveled most of the 90s, you know. On American Airlines alone, I did 2 million miles in that span. And that wasn't the only airline I traveled. And most of that was Dallas-Houston, Dallas-Houston, Dallas-Houston.

Then my daughter was born and, uh, and that it all coincided. Well, thank goodness. Some of it was luck. Some of it was my effort so that as she was growing up, I was there. I was there every, I don't think, uh, I maybe can list on one hand if I was pressed functions or events that I couldn't attend because daddy was busy or daddy was traveling. Yeah. So that value, um, you know, it's, it's priceless for me. And that was afforded quote unquote, uh,

Because I was a business owner and I had control to a great extent over my time and place. Yeah, I hear you. I mean, the reason that I am in the business I am today in its current iteration is because my kids, I got a divorce and I did not want my kids to be going to daycare after school. And so I had to figure out how can I create a full-time income for myself between 9 and 1.30 in the afternoon.

And so this is where I'm at. Yeah. And, and it's worked out beautifully and the kids now are, you know, getting their driver's licenses and stuff. I know it's crazy. I, you know, time has flown, but I'm so happy that I, like yourself, that I was always able to be the dad who participated in school activities or, you know, all those other things that kids like to do. That's right. You know, you and I were talking about before we started recording, you're going to take them on a trip and during their spring break, there is no,

There's no hesitancy on your part. You don't have to ask for permission. That's going to happen because you're the boss. Yeah, that's right. Yeah. Excellent. Tell us again where we should go to learn more about you and all of your resources.

Yeah, sure. So my blog site is kind of the central nervous system of all the stuff that I do. It's at davidcbarnett.com. And like I said, you know, find me on YouTube or any of the podcast apps, just look up David Barnett small business and I should come right up to the top. Oh, absolutely. There's two Ts on Barnett at the end. Thank you, David. As always great to have this conversation. Thanks for coming back on the show. Your jacket will be mailed to you once it gets tailored.

Who knows what that'll be. Thank you so much, Eric. Always appreciate the conversation. Always enlightening. Thanks for taking the time to be with me today. Thanks, Henry. Thanks for the invitation. Always a lot of fun.

This is Henry Lopez. That's David Barnett. Thanks for joining us for this episode of The How of Business. I release new episodes every Monday morning, and you can find the show anywhere you listen to podcasts, including at my YouTube channel, as well as on my website, thehowofbusiness.com. Thanks again for listening. Thank you for listening to The How of Business. For more information about our coaching programs, online courses, show notes pages, links, and other resources, please visit thehowofbusiness.com.