Ep. 58: How to Buy the Right Business for You

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Brian Shields: I think that the best business investments, frankly, are looked at from that lens where you can go through all the checkmarks of return on investment, but you also consider the human impact of that and find the right balance between the two because that'll give you long-term success. And when you have a long-term successful business, whether it's today, five years from now or 50 years from now, it'll be worth something to sell and a lot of people will benefit from it.

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Andrea Marquez: Hi, I'm Andrea Marquez, and This is Small Business brought to you by Amazon. Today, we're exploring the ins and outs of buying a business. We'll talk about where to find businesses and how to choose the right one for you with Brian Shields, an acquisition entrepreneur.

00:00:45

Brian Shields: Which is a multi-syllable way of saying, I like to buy businesses and continue to improve and operate them into the next generation.

00:00:54

Andrea Marquez: He's been doing that on and off for around 20 years now. But before buying his first business, Brian worked in private equity.

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Brian Shields: So I was at a fund in New York where we professionally acquired businesses, tried to figure out how to make them run better and ideally sell them in five years. I liked that. I was doing all the investment stuff, but I realized I didn't actually know how we made money. How do businesses make money? So I went to work at one of the portfolio companies to run a division for a while, and I never looked back.

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Andrea Marquez: So Brian decided to buy his first business, which was five vending machines. He eventually sold it off, but he learned a lot from that experience.

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Brian Shields: It taught me that there is some translation between institutional finance and valuing businesses, to a certain extent. It also taught me that where that part of it ends, humanity begins, right? The reason I won that business in the acquisition bid was the seller and I were just cool. We were able to vibe.

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Andrea Marquez: Brian also realized that you need to have business owner and business fit when you're looking at what business to buy.

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Brian Shields: And that was something I didn't totally appreciate. Just to tell you something about myself, I don't love driving. I actually very actively hate driving. But what this business required was that I drive to all the different locations and fill up the snacks and get the money and stuff like that. Well, I got tired of that pretty quickly. And so, luckily that kind of a business was easy to sell, so I was able to get my money back and put it with someone who could be a better steward of it than me.

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Andrea Marquez: We'll dig into these lessons in a bit. But first, let's go over why you might consider buying a business.

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Brian Shields: The way I like to think about buying a business is it should help you shortcut to something, right? And so, for people who are buying a business, typically the conversation is, I want to be an entrepreneur, but I don't want to do a startup.

00:02:46

Andrea Marquez: That's one way of looking at it. But if you're an existing business owner ...

00:02:50

Brian Shields: You're looking to either grow quickly or get something that helps augment the offering you have today. So you become a very different business very quickly by making a selective decision on which business to acquire. So I tend to find that those are kind of the pathways people find going down that road. And the thing I always caution people about is change. Change is always hard for people, both the buyer and the team that's coming from the other business. And this is something that I experienced with Hill & Co, the company that I acquired more recently. We acquired that from a retiring entrepreneur who had started it and ran it for 30 years and built it into a really meaningful business. And the previous owners in lead up to their retirement kind of just put off a lot of things that they could have done to make the lives of the clients and the team easier.

00:03:37

Andrea Marquez: And when Brian stepped in and talked about all the changes he was going to implement ...

00:03:42

Brian Shields: Some people were like, “Hooray.” And then some people were like, “The sky's falling.” I'm like going crazy. And that's natural, right? If you just think about any time you have experienced change in your life, whether it's moving cities or jobs, or in this case potentially business leaders, you feel some kind of anxiety around it.  

So if you can be empathetic with the team, you can manage the relationship and that transition effectively. But it does take a high amount of EQ and a lot of great communication to make sure that goes well. So that's one thing that I always caution people like, it's not just flipping a switch. It's not like you're buying a property and all of a sudden you get the keys and the doors are open and you can do whatever with the property. There are real humans and real people behind the business, behind the P& L that you need to be thoughtful and gracious towards as you make that transition.

00:04:31

Andrea Marquez: Okay, let's take a few steps back and go to the beginning of what you need to do when you've decided that you want to buy a business. First, you need to do your due diligence.

00:04:41

Brian Shields: That's just like the research and the analysis of the business you're buying. So I like to explain this in terms of buying a piece of property. So most people would like to walk the property when they have a chance, see pictures, get the inspections done to make sure they understand that the foundation is solid, does the roof need to be replaced, et cetera. So those are things that you naturally consider when you're buying a property.  

So is true for buying a business. You want to kick all the tires possible. And that means the financials, that means their reputation, that means their team, that means their processes. There are people that assist buyers with diligence, whether those are consultants, they're accountants, lawyers that kind of help poke around for these things.

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Andrea Marquez: And you also need to ask yourself one very important question.

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Brian Shields: Where is that business relative to what you intend to do with it? So if it's like, “Hey, I think that we should be completely remote,” you need to understand is this business hybrid or is it in the office, right? And then have a plan for how you're going to transition to remote. As I mentioned earlier, change is scary for people.

00:05:47

Andrea Marquez: And the way Brian finds the best deals and opportunities is by tapping into his network.

00:05:53

Brian Shields: So in a perfect world, and this is more so speaking to existing business owners, right? If you're thinking about growing through acquisition, you probably know your competitors in some frenemy, friendly way.  

And so, you probably have a sense that Jill runs a really tight ship. Jim, not so much. Jill is about to go through a divorce and maybe needs some capital and liquidity. Jim is running his business into the ground and is about to go bankrupt. And you can have a sense of what things you would need to get done, but also that creates the opportunity for you to come in and say, “Hey, let's find a way to partner,” and give you what's really important for you in your life as a business owner, but then take care of the business you've built.

00:06:33

Andrea Marquez: If you don't have a huge network of business owners, you can learn how to build your network by listening to episode 46 of this Small Business. We cover a lot in that episode, like how to prepare for and make the most out of networking events. Brian also says that there's more traditional ways of finding a business to buy, like doing a search fund.

00:06:53

Brian Shields: You will go on databases, you will talk to business brokers, you will send mail to a bunch of people in specific industries, and those are things that people should do too if you're thinking about being programmatic about this.

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Andrea Marquez: Now, let's break down what that due diligence process could look like.

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Brian Shields: So typically what you want to do is understand the way the business runs from the minute a client or a customer comes in to the minute cash hits your account.

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Andrea Marquez: Let's say you decided to buy a coffee shop. Let's see what that would look like.

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Brian Shields: You have to understand where the beans come from. How do they roast them? Where is the staff coming from? What are they paid? How do they get people in the door? How frequently? What are the seasonalities? Are things busy in the cold months and not so busy in the warm months? Or do different products sell in different parts of the year? Then you need to understand pricing. What are we charging for a cup of coffee? What are we charging for cold brew? How does that compare to other businesses in that geographic area? Do we have the opportunity to increase prices, et cetera? And then thinking about the building and the marketing, and do we want to expand? What's your growth plan? Do you want to keep just one location if you're buying it? Do you want to replicate this location? Do you want to sell the coffee as a branded item in grocery stores?

And then as you start to paint all of that picture, it will lead you to things you need to understand. For example, if those coffee beans are coming from one single vendor, you want to kick the tires on that agreement to make sure that you understand, “Hey, there's some protection for me, the new buyer, so that if I step into this, they won't change the pricing on me all of a sudden,” which is a real risk. You want to have a sense for if the lease on the property that you have the coffee shop in, will they keep the rent the same or is the term coming up a month after you buy it and will market rent then go up 20%? This is a real story that happened to me with one business. As you start to have these intuitive conversations with yourself about how does this business work, it will lead you to things you need to kick the tires on.

Now, do you need to know how to kick the tires on everything? No. Look, have foundation inspectors, roof inspectors, mold inspectors, appraisers with a property, and they're the same with buying a business. So hire an accountant, have them kick the tires with you. You want them to run what's called a quality of earnings report. It will cost money, so do it sparingly. But it is incredibly important because especially coming out of PPP time, there are a lot of people that are trying to pass off that loan and other things as revenue and hide things.  

So you just want to have somebody else kick the tires to make sure it's right. Get your lawyer to look at the agreements, have discussions with investors and lenders to see what they would ask. And really, just don't make these decisions in a bubble. That's really, really important and I can't stress that enough. The best decisions I've ever made, the best analyses I've ever run, were always in partnership with someone else.

00:09:39

Andrea Marquez: This was very helpful as a breakdown and a lot of questions you need to be asking yourself and others. And then, once you've done your due diligence on the business you want to buy, now you have to figure out how to pay for it. Thankfully, there's a few things you can do to fund your new business.

00:09:54

Brian Shields: You can raise private capital from friends and family and say, “Hey, I'm going to buy this business. I'm putting together a loan. It's whatever, a million bucks. I'm going to pay 10% on it and I'll pay you back in five years.” So these are all things that are possible. What are some nuances in this space?

00:10:09

Andrea Marquez: And in some cases, Brian says that the seller might give you a loan.

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Brian Shields: So it's what's called seller financing, which exists to a certain extent when you're buying a property, but it's really, really prevalent buying a business. So let's say I'm buying a $ 100 business. I have $ 30 in cash. Maybe I get another $ 50 from the bank through an SBA loan or a commercial loan or whatever, but then I still need another 20, right? So a lot of cases you'll say, “Hey, seller, because this is a non-traditional asset, the bank's willing to lend this much, and I want you to feel like you're getting full value. Could you finance the rest of it and I'll pay you back from the cash flow of the business over time?” And so for them, they would do it because they get a cash payment now of the 80, that's the $ 30 plus the $ 50, and then the 20 would be on the come.

00:10:55

Andrea Marquez: You can also get the seller to roll over equity.

00:10:58

Brian Shields: Which means instead of them financing 20 and giving you a loan, they just say, “Cool, I will keep 20% ownership in the business. I'm selling you 80. You're in control, but I've sold it to you now.”

00:11:08

Andrea Marquez: So a lot is about negotiations, and that's why buying a business from someone you know is usually a good place to start, because ...

00:11:16

Brian Shields: The more the seller trusts you, the more they can be willing to be flexible.

00:11:21

Andrea Marquez: And once you buy a business, there's a few things you need to keep in mind.

00:11:24

Brian Shields: When you're in charge, people look to you as your word is gospel. And so, that might mean that if you're thinking out loud about something, people might take that as directive to act. That's an easy one. A more nuanced one might be like, I know for me sometimes I might be frustrated about something or I might give someone criticism, but not in an energetic way. I just might be like, “Hey, man, next time, let's do it this way.” But because I'm the boss or the business owner, they're like, “Ah, I'm going to get fired tomorrow.” So you have to be clear about how you wield power.

00:11:56

Andrea Marquez: And it also helps if you're aware of the responsibilities you now have, especially towards your employees.

00:12:01

Brian Shields: They have desires, dreams, passions, and ultimately you are a huge part of them feeling secure in pursuing those things and contributing that energy to this business. So keeping yourself sane and stable is really important because you have to make decisions that impact those people.

00:12:17

Andrea Marquez: Okay, we covered a lot. So let's circle back on some of the lessons learned that Brian pointed out. One, make sure there's a business owner and business fit.

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Brian Shields: As an example, I looked at buying this photography business four or five years ago. I loved it. It was super high profit. It was super cool. The majority of the business, the revenue came in a six-month period of the year. So I was like, “Cool, we can buy this and get most of the work done in part of the year and it pays for the rest of the year. And I can chill.” However, it would require me to be on during the holidays, and I would have to miss family dinners and maybe family events, and that just didn't align with my values, so I couldn't do it. I tried very hard to figure it out, but I couldn't do it.

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Andrea Marquez: Two, be honest with yourself about what your unfair advantage and potential impact can be with the business.

00:13:01

Brian Shields: You need to be clear with yourself about what you can do and what you're willing to tolerate in that context. People talk themselves into things all the time because the numbers look good.

00:13:10

Andrea Marquez: Three, consider doing this with a partner.

00:13:13

Brian Shields: Don't do it alone. My partner on my last business acquisition and I worked so well together. The man saved me from just insanity. Just having somebody else to talk to, to bounce ideas off of, to make better decisions with was incredibly helpful.

00:13:29

Andrea Marquez: And if you're still feeling a little nervous about going out there and finding a business to buy ...

00:13:35

Brian Shields: Try to look at least a hundred deals to help dial yourself in, so you know what kind of risk you're willing to take, what kind of business plan you really feel comfortable with, what kind of industries you feel like makes sense. Because once you get those under your belt, then you'll feel a little bit more sophisticated when the time really comes. It's like practice before you play, right? And that practice will make you proficient. That's what I tell my daughter. So get out there and practice.

00:14:00

Andrea Marquez: I love that, practice makes proficient. So just go out there and start your search. That was a lot of very helpful information. If you didn't get the chance to write down everything, don't worry we've taken notes for you. You can find them at smallbusiness. amazon/ podcasts.  

That's it for this episode of This Is Small Business brought to you by Amazon. If you liked what you heard, make sure to subscribe and tell your friends about us by sending them a link to this episode. And if you have any thoughts or other topics you'd like me to cover, let us know by leaving us a review on Apple Podcasts. It's easier to do it through your phone or send us an email at thisismallbusiness@ amazon. com.  

Until next time, This is Small Business. I'm your host, Andrea Marquez. Hasta luego , and thanks for listening.  

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