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Smarter Than a Startup -- David Barnett #5888 · Financial Survival Network

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  Even if you're buying something that isn't quite exactly what you envisioned that you would
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  like to have, because we get this idea of buying a profitable platform.
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  Once you have a business that is making money for you and it contains a
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  lot of the resources that you need for whatever it is that you really would
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  like to do, you can then build that new thing, that new concept,
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  on top of that existing business, and you're basically given yourself infinite runway
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  because you're already making money from day one. You're listening to carry Letts's Financial
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  Survival Network, where you get valuable information you just can't find anywhere else to
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  thrive in today's trying times. You need the Financial Survival Network now more than
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  ever. Go to Financial Survival Network dot com and get your free newsletter and
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  gift. Financial Survival Network now more than ever, and welcome you are listening
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  to watching the Financial Survival Network. I'm your host carry Lets. As we
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  to the dog days of August, you might be thinking what should I be
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  doing? Should I start a new business? Should I buy a business?
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  You got some extra cash, you want to do it in the least risky
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  way possible. However, you want to get the maximum return. And someone
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  who's an expert in that he hasn't been on the show in more than half
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  a decade is David Barnett. David's got about twelve books out there, I
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  think, and hey, your latest book Smarter than a Startup? But among
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  them it's how to Sell My Own Business? I did that invest local credit
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  card advantage, Twelve things to do before you consider selling your business, and
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  a bunch of other books too. David, it's great to have you back
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  on the show. Hey, Carrey, it's great to be here. How
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  are you today? Excellent? So, looking at your latest book, you
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  kind of tip your hand in the title Smarter than a Startup? Tell us
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  about that? Yeah? Sure. So you know, a lot of people
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  want to get into business, and there's an awful lot of content out there
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  about starting a business and what it's like to start a business, how to
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  plan to start a business, and so the purpose of the book was simply
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  to give people a pro and con of why it might make more sense to
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  look at buying a business instead of starting one, even if somebody has some
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  kind of unique and creative idea. And this is the key, because I've
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  witnessed this in my own career, where someone has wanted to start a new
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  kind of business and maybe the market was improven or they didn't really know what
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  the demand was going to be. And so you guys, you can imagine
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  starting a business like that entails even more risk than the average business startup.
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  And so what I've seen people do successfully is by existing profitable businesses that just
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  happened to contain some of the resources they needed for this new idea that they
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  had. And so it's almost like the idea is to acquire a business that
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  can provide an incubation base for the new idea that you want to explore.
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  And it's all about reducing risk at the end of the day. All right,
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  So I've started businesses. Most of the businesses I've been in started from
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  the ground up, but I've done a few turnarounds, and I can tell
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  you that it's easier to do a turnaround to buy an existing business, even
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  if it's marginally profitable or losing some money a little bit, not humongous losses,
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  but manageable losses, and then to turn it around because you know,
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  when you start a new business, you've got to have a system for everything
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  and even though systems are easier than ever because of the cloud based applications out
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  there like quick books online, like so, like CRMs client to you know,
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  management systems. Even with all that, it's easier to get a company
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  that's running all right, that has that has dollars coming in the door,
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  even if they're doing things wrong. Then it is to start from the ground
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  up. Well. Yeah, and I think the thing that you're pointing out
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  there is that one of the most difficult things to get in businesses the dollars
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  coming through the front door. And it's that race to get enough customers fast
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  enough that many new startups loose and they don't quite get to the point they
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  need to to hit that break even point. Or I like to point out
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  that you know, once you hit the break even point and you're breaking even,
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  you really haven't broken even because then you got to recover all the losses
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  that you put into it over the course of time that it took you to
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  get to that point. And so it really is an uphill battle. It's
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  hard to get a new business up and off the ground successfully. Yeah,
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  and very few people are able to keep them going five years or more.
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  Right, Yeah, it's true and so this is why in the book I
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  propose the idea of instead of starting, you should be looking at buying,
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  even if you're buying something that isn't quite exact actually what you envisioned that you
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  would like to have, because we get this idea of buying a profitable platform.
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  Once you have a business that is making money for you and it contains
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  a lot of the resources that you need for whatever it is that you really
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  would like to do, you can then build that new thing, that new
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  concept, on top of that existing business and you're basically given yourself infinite runway
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  because you're already making money from day one. You know, people will say,
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  well, what about the money. It costs a lot of money to
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  buy a business. And the fact is that when you buy an existing business
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  that is already profitable, it opens the doors to a lot more in the
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  way of financing opportunities because lenders can see that the business can afford to make
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  repayments. It's when you start something new that you have no proven track record
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  or no cash flow to look at. This is this is difficult. And
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  you know, if you've got money accumulated that you're going to use in your
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  startup effort, you can very often and parlay that money into doing an acquisition.
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  So there any secular sectors that you like right now that if you were
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  looking to start a business or buy one, you would be looking at.
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  I'm a big fan of that cliche. The riches are in the niches,
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  and so I always tell people that, as far as I'm concerned, one
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  of the best things you can do is look for businesses that don't have a
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  high degree of visibility, so industries that are not really front and center and
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  very public all the time. And look for industries where you're able to get
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  healthy margins and you can protect them in large part because other people just don't
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  happen to notice. You know, very public, very front stage kind of
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  business that is doing well. We'll attract attention and ultimately attract new competitors.
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  It's a function of capitalism. Hey, what do you think of the property
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  management space? I like property management, and one of the big reasons why
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  I like it is because it's a service business with little in the way of
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  capital assets. You basically are making a real estate play without having to invest
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  in real estate. Right now, it's competitive and you have to have great
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  systems and execution. But if you can do the job correctly and your customers
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  are happy, they'll probably stick with you. It's one of those businesses where
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  oftentimes it's not because someone else comes along and steals your client from you that
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  you lose a client. It's because you did something to upset your customer.
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  And a lot of the times I've worked with people in similar industries where they'll
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  describe their sales cycle as waiting for their competitors to mess up, you know,
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  and creating an opportunity for them to come in. I was going to
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  say that, so, like with property management, people are always upset,
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  especially you know, it's just a huge level of dissatisfaction for a lot of
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  reasons. A lot of them aren't doing what you should be doing here,
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  right, So really there, pulling customers away isn't a big deal because most
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  of the customers are looking anyway because they're dissatisfied with their existing company. Well,
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  you know, I've got some experience in this because I used to own
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  apartments and I remember I was looking at different management companies and then the one
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  I chose they really blew me away because they had a Then this was over
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  ten years ago, but they had a really up to date system, so
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  they would send me these detailed reports at the beginning of the month showing the
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  collections and everything they had spent on. And every time they got calls from
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  tenants about certain issues, I was kind of kept in the loop with a
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  CC email, and so I knew what was going on, and I was
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  always informed and feel like I was in the dark. And as in any
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  sales or any kind of customer service management, setting expectations is the number one
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  thing, isn't it. And so if you keep setting expectations and letting people
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  know what's going on, it's going to be harder for them to be upset
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  with you. Yeah, and that's great they had a system in place.
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  Although too much information could drive you a little batty, But maybe that's the
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  idea that just dumps so much on you that you wind up just ignoring it
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  and saying they're doing their job until you find out otherwise. What about this
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  concept that buying a franchise, Well, yeah, one of the other books
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  that I wrote a few years ago is actually called Franchise Warnings, and it's
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  one of the few books out on Amazon that actually talks about some of the
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  downsides to the franchise business model. There's a lot of success in the world
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  of franchising. You really have to look at what you're getting for your money.
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  You know, when you start a new franchise location, you're dealing with
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  a lot of the same issues that a new startup has. You have to
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  get customers that are being served presumably by someone else right now, so you
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  still have to fight for that in the front door revenue, you still have
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  to find your place in the market. And on top of it all,
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  you've got almost an extra layer of government over your head. You know,
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  the franchise or takes a cut off the top and can dictate to you how
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  when you do things and when you need to spend money on upgrades or improvements
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  in this kind of thing. And so it works very well for some people.
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  If you're super creative and innovative and very entrepreneurial, it may not be
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  a good option because you have to very much color within the lines when you're
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  part of a franchise network. But for some people, you know, if
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  you've got a background and experience of living within someone else's rule set, it
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  can work out all right. So, yeah, what about buying an existing
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  franchise location that's already producing income. It's you know that, that's actually one
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  of the suggestions that I put in my book Franchise Warning. So I'll say,
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  if you really are in love with a certain franchise brand, the best
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  of both worlds is to find an existing location that stuff for sale, because
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  then you can actually get a peak at its actual track record, right,
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  and it's already got the performance in place. And it's interesting because resales in
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  the franchise world will sell just like this, just like any other independent business
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  will sell for the price is a function of the cash flow, whereas in
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  new location the price is a function of what it costs to build it open.
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  And it's interesting because within many franchise systems, you can often find resale
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  units that are cheaper to buy than opening a brand new unit. Yeah,
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  because it could be millions of dollars to open the unit, right, hundreds
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  of thou Yeah. Especially with some of these big physical location type franchises like
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  restaurants and things like that, you can spend a ton of money on real
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  estate improvements in buildings that you don't own, and you've got to recoup that
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  money over the life of your operation, and you know the capital expense can
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  be can be quite high. That's true. Yeah, all right, So
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  what about financing? You want to do this business, you want to buy
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  it. Banks are pulling back now, as we've seen from the banking crisis,
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  So that's putting the squeeze on people, isn't it. Well, it's
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  becoming more and more difficult. You know, they're in the United States.
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  Anyway, there's still a great deal of SBA financing being done on business acquisitions.
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  If the deal cash flows, bankers will make the loans. The challenge
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  for a lot of sellers is that, you know, they want the prices
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  that people were getting in twenty twenty one, and the reality is that with
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  these higher interest rates, buyers just can't afford that. The cost of the
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  money, the higher interest payments have to come out of the cash flow of
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  the business, and most prudent buyers are pricing in even higher interest rates.
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  SBA seven A loans are variable, and so people buying today are being quoted
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  ten ten and a half percent by their bankers, and I know people are
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  planning for another couple of points of increase, So this means they can't afford
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  to pay as much as they used to. I know that some deals are
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  falling apart because of that, but you know, I believe that for those
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  sellers, they're not really paying attention, and it could be that their business
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  may be worth even less down the road at these rates continue to go up.
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  Yeah, probably they'll never forget more money for the business than they'll get
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  right now. Right, Yeah, well, you know it, hindsight is
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  always twenty twenty, right, And twenty twenty one was a fantastic year for
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  people to exit. There were all kinds of government programs who were taking advantage
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  of, and interest rates were low, meaning buyers could pay top dollar.
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  You know, you've got a powerful entity out there, you know, the
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  central Bank, who is actually trying to create a recession. And I don't
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  know why people don't pay attention to that, but usually what those guys want
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  they get. You think they'll be successful in creating the recession they're looking for.
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  I think they're going to try until they get it, until they get
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  the right formula. Huh yeah, yeah, Well they're trying to get inflation
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  under control. All right. So you've been at this game for a while,
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  David. Going back, if you could go back to yourself twenty at
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  age twenty one, what would you tell yourself at age twenty one? That's
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  a great question. Carry I would probably not change anything. You know.
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  The path that I've been on that has led me to where I am today
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  has been a pretty good one. I probably would have told myself to buy
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  Brix and sell it a hundred. How about that. I'd probably been good
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  advice back then. I would have told myself to buy Tesla and never sell
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  it at least, but in any of the hindsights twenty twenty, but as
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  far as maybe you could have done things quicker, more profitably, avoided some
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  mistakes. Yeah, you know. It's it's interesting because every time I want
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  to look back at something with a bit of regret, I realized that part
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  of what I learned in that period of my life is valuable to me now.
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  And maybe maybe that's the lesson. It's just no matter what you live
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  through, you know, look for the value that you're generating for yourself.
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  It's funny today, you know, I promote myself on YouTube and for example,
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  and you know, earlier in my life I was actually on the radio,
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  and so part of that experience helps me today. You know, I
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  went through a career of owning a business brokerage office. It was a crazy
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  up and down roller coaster of cash flow. It gave me all the gray
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  hair I have. But living through that experience gave me the knowledge understanding that
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  I need today to do the consulting work that I do. And so I
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  think, as long as you are learning and developing yourself, even if things
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  seem rough, take what you can out of it. There's a great book,
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  you know, Gene Simmons, the bass player there for Kiss. He's
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  got that great He's got a book called Me Inc. In which he describes
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  his own journey back and forth between self employment and employment, you know,
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  and his advice to people is to always be doing things that develop yourself and
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  take a job. If you can develop yourself and learn something from it,
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  build upon that in your next enterprise. And I had just thought that book
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  was amazing, and I would I would repeat the same kind of sentiment,
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  you know, that you live through things and you'll learn along the way.
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  He will. Hey, my father always used to say, anytime you go
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  into a new business, you're gonna pay for lessons, right absolutely, yeah,
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  Yeah, and you're either going to pay with time or money one of
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  the two, but you're going to pay right Yeah, So hey, your
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  top just before we go top three businesses, segments, industries, if you
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  will, that you would be looking at if you were going to buy a
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  business. Now, if I was going to buy a business, I would
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  be looking at again, things that cannot be delivered by Amazon number one.
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  So you don't want to be competing against these big trend trends in the marketplace.
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  So something that can't be delivered by Amazon, I would be looking at
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  something that would leverage AI at the small business level. So AI is being
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  put into everything right now. You know, big companies are using it in
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  a lot of different ways, and so if you're in the world of small
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  business trying to compete with big companies, you're probably going to be at a
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  disadvantage. But if there is some reason why your industry is always going to
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  be dominated by small business people like yourself, a vastly diversified ownership of enterprises,
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  then you want to look for something where you're going to be able to
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  employ AI. So think about something like auto repair. There's always going to
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  be auto repair. It's likely always going to be small, local, independent
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  businesses. But is there you know, something like auto repair where AI could
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  come in and really help you if you're open to it and open to experimenting
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  and implementing new things quickly. So that would be the second thing. And
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  the third thing, like I mentioned before, is good margins. You know,
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  gross margin is probably the most important line on the P and L,
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  and too many people, I think don't understand that. You can get into
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  a lot of trouble in business if you don't understand your margins, understand where
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  you should be for your industry and defend that margin properly, or build a
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  reason why people want to or choose to or need to keep doing business with
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  you over competitors. Right, all right, well, hey, they really
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  appreciate you coming on. Tell us where we find you, how we connect
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  with you on the web these days? Sure, I can always be found
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  at David C. Barnett dot com. It's my blog site. There's an
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  email list there that people get signed up to, and if you're interested in
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  learning more about buying, selling, financing, or managing small and medium sized
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  businesses. My YouTube channel has over six hundred videos, almost entirely created by
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  questions that people have submitted and I put the audio of that onto the podcast
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  feed. So if you just look up David Barnett Small Business, you'll find
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  me all right excellent. The link is in the show notes this interview on
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  Financial Survival Network dot com. Make sure you click it. While you're there,
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  go sign up for your free newsletter. David. Always enlightening, always
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  interesting speaking with you, learning things about businesses that I didn't know. We
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  will definitely talk to you again, and we won't let half a decade or
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  more go by. Sounds good, Carrie, Thank you, thanks for listening
• 19:18
  to carry Lets's Financial Survival Network, your solution to today's trying times. For
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  the latest, go to Financial Survival Network dot com. Financial Survival Network now
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