Hey Contrarians,
If you caught last week’s newsletter, then you learned something new about me…
I don’t want you to buy a business.
Not unless you understand what it is you’re getting into.
Not unless you appreciate the masochism of skin in the game.
Not unless you know what you’re doing.
I hear students who go through our education repeat the same sentiment: “I didn’t even know what I didn’t know.”
Today, I want to scratch the surface of what you might not know. And I’m gonna need more than just 10 commandments to do it…
Today in 10 minutes or less, you’ll learn:
✔️ Contrarian framework: The Fourth Path
✔️ The Golden Rule of biz buying
✔️ 20 commandments to not absolutely f*ck up buying a business
CONTRARIAN FRAMEWORK: THE FOURTH PATH
There are 3 traditional paths to making income:
- Working a job.
- Investing, usually stocks or real estate.
- Starting your own company.
There’s a fourth path that’s long been overlooked… And it’s about to explode:
Business acquisitions.
- Acquisitions have a higher success rate than startups.
- The right acquisitions have a much higher cash-on-cash return rate than real estate.
- And acquisitions are still a form of self-employment, which means higher satisfaction, greater income security, and more freedom of time.
Buying a business is the secret Fourth Path to building wealth.
You don’t need to be an elite investor, PE firm, or even an existing business owner to do it. You just need to know what you’re getting into.
So, what does buying a biz even look like?
I have a couple rules you need to follow before you even THINK about your first deal.
THE GOLDEN RULE OF BIZ BUYING
I’m no Sunday School teacher, but I do know that the 10 commandments all get summed up in the golden rule.
There’s also a Golden Rule of Business Buying. It has two parts:
It’s such obvious advice, I hope I haven’t insulted you. Yet so many people make these blatant mistakes.
Here’s how to make sure you don’t…
I compiled a list of rules for your first deals that I like to live by.
(I’ll add to them, too. Email me back anything you think I missed. We are in this together.)
20 COMMANDMENTS TO NOT F*CK UP BUYING A BUSINESS
1. No unprofitable biz’s or turnarounds.
You are not a pro yet.
Once you are a pro, you can buy the ugly house on the block, fix it up, and flip it. For now, you wouldn’t even know how to stucco a kitchen.
So keep it easy for yourself. Buy a nice house in a nice neighborhood (that cashflows), and wait.
2. Don’t do an SBA loan on your first deal.
This is controversial, but for me at least, I would never do a non-recourse, personal-guaranteed loan on my first deals.
Unless you are very rich and can cover the cost of paying it back, have investors who can cover it for you, or have massive cashflow to cover it through salary, etc… I don’t recommend.
There is nothing worse than the weight of debt you cannot repay. As you get more sophisticated, you can do debt well. But in the beginning, be careful.
If you only have $100,000 in the bank but you want to buy a business for $2,000,000 with an SBA loan, that could wipe out every penny you have + your house with a personal guarantee. I wouldn’t do it. Ultimately up to you, but find ways to decrease and diversify risk.
3. Diversify your risk.
You don’t need to take down your whole first deal yourself. Get seller financing, raise from investors, use different types of loans. Do not mortgage your house to buy your first biz.
If you want to do a deal for $200,000 with a business that costs $200,000/year to run, think of it like your savings. I ensure I have enough cash for a 12-month emergency fund in case I make no money during that period. You might want to do the same.
4. Seller financing – do it.
This is harder to get, but it’s also common. Get the seller to take on some risk with you.
What is the likelihood they sell you a business that won’t make any money if you have to pay them back with the profits from that business? Less likely.
What about if you buy the business for “more money” in total valuation but you give them an option to just take the business back at any point if you don’t pay? Worst case, you are out time and the business, but you aren’t out tons of cash and saddled with debt.
5. Revenue and profit share partial deals.
If you’re inexperienced, your first deal maybe even doesn’t have you at the helm. It has you taking down a portion of a deal with sweat equity, special expertise, or something else you bring to the table.
Say you’re in marketing and you want to buy a marketing company. What if instead you:
• Partner with an owner of a business
• Tell them you want to use your skills to increase their revenue by 25%
• IF you do that, you want to be paid 15% of top-line revenue you brought in, plus 15% equity in the business and a right to 15% of the distributions they take annually.
6. Have an exit plan.
How long will it take you to sell this business if you need to? Start knowing who would buy you up early. Ideally, I’d know before buying so if I got in and hated the deal, I’d have someone to flip it to.
If you’re buying a laundromat, who could buy it from you later? What are the laundromat roll-ups? Who else owns one close (but not too close) to yours?
7. Downside scenario planning.
What if your worst year happens this year? Are you still profitable? If not, we pass. What if the sales fall by 50%? Still profitable? If not, we restructure the deal so we don’t lose our shirt.
8. Cash position plan.
Do you know most businesses don’t even know how much cash they have on hand and how long that cash would last if their sales stopped or slowed?
You will not be most people. You’ll know.
You’ll also ask yourself, “Self, do I have enough cash raised, in the business, with investors, or with myself for hard times?” What if you need more cash? You need a plan for how you are going to get it within a 60-day window. Have this and you’ll sleep well.
These are fake numbers, but you should have something like this: weekly revenue, monthly revenue, year-to-date all actuals vs projected. Then at the bottom, what your profit, expenses, margin, account balances, and runway are.
9. Don’t buy a job you’ll hate.
Most of my early deals were too small. Great for not making big mistakes, but not fun for having to run them. It’s a balance.
10. Don’t keep your deal private.
Shortcuts will kill you.
We have group members in our Contrarian Community who did not share the final deal terms and analysis before they bought a business. WHY? Terrible idea.
What often happens: Deals move fast. You get caught up in it, you feel good about it, and it sucks to share your baby and have people call it ugly.
Do the opposite of what feels good. Find a wet blanket friend, have them review, and keep whittling down until even they get on board.
11. No opportunities to lose more than 20%.
I never do a deal that could wipe out more than 20% of my net worth.
These days, that number is more like 5% of my net worth. It just won’t matter. If I lose $100k or $1,000,000 on a deal, I am going to be fine. In the beginning, I would NOT have been fine.
Know your 20% or less number before looking at deals.
12. Careful with franchises.
Franchises play an important role in business-land, but they are usually harder to sell and come with more mandated costs. Be cautious.
13. Valuation of ALL big equipment.
One of the biggest deals I’ve seen go sideways was largely because of one thing. They were a transportation business, and they didn’t get an outside valuation of their most expensive asset: their trucks.
It is very normal pre-sale for people to “band-aid” equipment so that the repairs don’t come out of the P&L and costs. If you’re buying assets, inventory, real estate, etc., please get a valuation or two.
14. Partners: proceed with caution.
Imagine every partner you have will leave you high and dry. It’s certainly happened to me. I didn’t always have a lot of rules for partners, but now I do.
Here are the major two:
- No partners get equity upfront without cash in the game. Never give away equity without a vesting schedule. They need to do the deal with you, put in the same amount of cash as you, AND they need to still vest so they can’t walk away leaving you stuck with the bag.
- No 50/50 partner. Someone needs to be in control, and it’s probably you. Or whoever has the most skin in the game. You also need to make sure you have a partnership agreement, with clear deliverables on both sides and a pre-set exit provision if it doesn’t work out.
15. Keep your day job.
For your first deal, do me a favor. Keep your day job until you’re sure you really know what you’ve got on your hands. Or one spouse goes to run it while the other gets a paycheck.
Unless you have highly de-risked the business, had success before, have a cash stockpile, or have inside access to the deal, please allow some breathing room.
16. Deals take a year.
Ask anyone who has done one. It’ll take you 3-6 months to close, and then another 6-12 months until it’s motoring. Just like starting a new job, you are on a new venture. Don’t make the mistake of adding before you’re ready.
17. Mitigate “go to zero” risk.
Ask yourself the question, “Could this business go to zero?” Then model out how. Then create a plan for what you’d do to de-risk that.
If you buy a property management company with 30 clients and 20 of them are owned by one group, you could lose all 20 overnight. So what do you do? Decrease the asking price or hold cash in escrow for a year or two in case those 20 leave while you add more.
18. Bring in the expert.
You could build a house with just the internet and your ideas. Or you could find the help of a construction expert or consultant. Which would you choose?
Doing it yourself is cheaper up-front, but my bet is it’s more expensive, time-consuming, heartache-inducing, and full of mistakes long-term. Same with buying a business – get with experts in your industry before you purchase.
19. Financial reporting.
Businesses have to be monitored. You need P&Ls, cashflow statements, and the ability to see into the bank account, always.
I think of it like when you go to the hospital and get hooked up to an EKG, so even if you’re just there for a checkup they know your status. Every business should have this.
20. Don’t fall in love.
In dealmaking, my father told me, “Never fall in love with something that can’t love you back.”
This is the kiss of death. You’re too far into a deal, you really want to close it, the seller knows that, so right before you go to close… He adds more cash he needs. Or tells you the seller financing amount dropped.
Tiny papercuts can bleed you out. Hold the line. There are too many deals to fall in love with one.
So… Are you ready?
– Codie
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