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Buyer Beware: When Failure Isn't Final — The Jed Morris Story · Carson's Corner: Entrepreneurship & Investing

• 0:00
  SPEAKER_00: The amount of capital you can raise is directly proportional to your ability to raise it.
• 0:03
  SPEAKER_00: Sounds a little, you know, circular, but it's absolutely true.
• 0:06
  SPEAKER_00: Today's guest is Jed Morris, an Air Force veteran, acquisition entrepreneur, and founder of Searcher School, helping buyers avoid costly mistakes in small business acquisitions.
• 0:15
  SPEAKER_01: I can get on a phone call right now.
• 0:16
  SPEAKER_01: Like I don't have a committed fund.
• 0:18
  SPEAKER_01: I don't have a hundred million dollars to do it, but I can get on a phone call right now and have a serious conversation with a seller who runs an enterprise value company of$50,$60 million, and in complete conviction tell you that I can raise that money in the next 90 days if we go under LOR.
• 0:30
  SPEAKER_05: Do you find it that there's more probably fraud on the smaller deals versus the bigger ones?
• 0:35
  SPEAKER_05: Yeah.
• 0:35
  SPEAKER_01: Is that correct?
• 0:36
  SPEAKER_01: What I have learned is that most people in this space are not as smart as you think.
• 0:39
  SPEAKER_01: Just because someone can whip up a financial model does not mean they're intelligent.
• 0:42
  SPEAKER_01: So I had this big misconception that, like, oh, all the PE analysts at these first must be geniuses.
• 0:46
  SPEAKER_01: They all went to war.
• 0:47
  SPEAKER_01: And I realized, oh, okay, they're smart, sure.
• 0:50
  SPEAKER_01: But you know, the problem you're into is that you absolutely need to have some level of expertise.
• 0:54
  SPEAKER_01: And if you do raise money.
• 0:56
  SPEAKER_01: And you talk a lot about shady owners.
• 0:58
  SPEAKER_04: What are some examples you've seen of there's always one of the risk?
• 1:01
  SPEAKER_01: So what you're doing during diligence is you're trying to mitigate as much risk as possible because it's only as good as the person doing the quality runs, and it's only as good as the data that they have.
• 1:08
  SPEAKER_01: Even if you've got the best team and the most capital and you do all the research you possibly can, you're never going to be able to remove all the risk because there's always going to be information asymmetry that the owner has to utilize.
• 1:18
  SPEAKER_01: So at some point, you still have to be able to take the lead.
• 1:21
  SPEAKER_05: A lot of what I'm seeing is, you know, people in real estate make the mistake of going too small by like doing like a little rental house where they should have gotten partners and gone bigger.
• 1:30
  SPEAKER_05: But sounds like you did that.
• 1:31
  SPEAKER_05: So you did the landscaping thing and you didn't do well.
• 1:34
  SPEAKER_05: It was a bad experience.
• 1:36
  SPEAKER_05: What have you learned from you know your failure that as you know, what are you looking for?
• 1:41
  SPEAKER_05: What I have discovered is that.
• 1:44
  SPEAKER_03: Welcome to the Carsons Quarter.
• 1:48
  SPEAKER_05: All right.
• 1:48
  SPEAKER_05: I have the pleasure of sitting here with Mr.
• 1:50
  SPEAKER_05: Jed Morris, uh, author, soon-to-be author of Buyer Beware.
• 1:57
  SPEAKER_05: Knows quite a bit about acquisitions uh for small businesses, medium-sized businesses, and uh have him here.
• 2:04
  SPEAKER_05: And I'm gonna pick his brain about what's going on and his coaching program.
• 2:08
  SPEAKER_05: He coaches um, you know, students on how to acquire businesses, how to help them with their search.
• 2:16
  SPEAKER_05: Uh, has a ton of experience.
• 2:17
  SPEAKER_05: So uh, Jed, how are you doing, man?
• 2:20
  SPEAKER_05: I'm doing fantastic, Carson.
• 2:22
  SPEAKER_05: Hey, thanks for having me.
• 2:22
  SPEAKER_05: I'm really excited about it.
• 2:24
  SPEAKER_05: Awesome, man.
• 2:24
  SPEAKER_05: Are you where are you are you in San Diego?
• 2:27
  SPEAKER_05: I am.
• 2:27
  SPEAKER_05: I'm in San Diego, currently in downtown.
• 2:30
  SPEAKER_05: Awesome, dude.
• 2:32
  SPEAKER_05: So you um are with Sunset Coastal Partners, right?
• 2:35
  SPEAKER_05: And y'all do uh coaching for people that are searching for businesses.
• 2:40
  SPEAKER_05: What's your main focus?
• 2:42
  SPEAKER_05: Just to keep people out of out of trouble and you know have a more efficient search?
• 2:46
  SPEAKER_05: And how do you do that?
• 2:48
  SPEAKER_01: Yeah, overall, yes, that is the main focus.
• 2:50
  SPEAKER_01: Um, so at Sunset Coast, it's two, it's there's actually two primary focuses.
• 2:55
  SPEAKER_01: Um, the first one is we're an independent sponsor firm.
• 2:58
  SPEAKER_01: Um, me and my partners, we are looking exclusively on government contracting firms in the lower middle markets that we can acquire.
• 3:04
  SPEAKER_01: Um, the second focus, though, is searcher scheme, which really started in August of last year, so August 25, which started off as a coaching program.
• 3:13
  SPEAKER_01: I, you know, obviously I get a lot of searchers who reach out, ask us for questions, and it just became it became unmanageable.
• 3:19
  SPEAKER_01: My calendar just filled up because I always want to try to help as much as I can.
• 3:23
  SPEAKER_01: And so that turned into just building a group, which then turned into like I thought it would be like, you know, you know, helping people navigate, you know, diligence, helping people navigate um, you know, negotiations and capital structure, and all of that is true.
• 3:36
  SPEAKER_01: Um, but what is really just focused in on is just how to actually search, like how to, especially on the off-market side, how to actually do lead generations.
• 3:43
  SPEAKER_01: Um, and that's where I find a lot of people have their biggest struggles.
• 3:46
  SPEAKER_05: Yeah.
• 3:48
  SPEAKER_05: How are you searching?
• 3:49
  SPEAKER_05: I don't want to give away the whole uh coaching program, but you talk a lot about like using Claude and other tools, you know, or you just you're just plugging away, and it sounds like a lot of a lot of legwork that you probably set them up on, but after it gets going, there's a lot of lead generation that's kind of automated.
• 4:07
  SPEAKER_05: Is that right?
• 4:09
  SPEAKER_05: Oh, yes and no.
• 4:10
  SPEAKER_01: Um, I'll tell you, um most of what we're doing isn't new, right?
• 4:15
  SPEAKER_01: It's the same kind of off-market searching that I was first exposed to back in 2020, 2021 when I first became a self-funded searcher.
• 4:21
  SPEAKER_01: Yeah.
• 4:22
  SPEAKER_01: And, you know, I attended the HBS ETA conference in the fall of 21.
• 4:27
  SPEAKER_01: It was the first ETA conference I ever attended.
• 4:29
  SPEAKER_01: And I remember sitting in these classes thinking, wow, this is really cool.
• 4:32
  SPEAKER_01: I was really, you know, drinking the ETA Kool-Aid, I was very much in the self-funded searcher space.
• 4:36
  SPEAKER_01: And but I walked with in a lot of the events thinking, this is great and all.
• 4:40
  SPEAKER_01: Theoretically, I understand capital structure.
• 4:42
  SPEAKER_01: I understand like how all this is supposed to work, the strategy behind it.
• 4:46
  SPEAKER_01: But how are people actually searching?
• 4:47
  SPEAKER_01: How like tactically?
• 4:49
  SPEAKER_01: And it kind of felt like at the time, like no one wanted to like give away the secrets.
• 4:53
  SPEAKER_01: And what I found is that they're actually not that secret.
• 4:56
  SPEAKER_01: So to answer your question directly, off-market search is it's sales.
• 5:00
  SPEAKER_01: It's straightforward, it's sales.
• 5:01
  SPEAKER_01: And so it comes down to building a list and executing cold outreach on that list.
• 5:06
  SPEAKER_01: And there's a million ways you can do it.
• 5:08
  SPEAKER_01: But what I find is the vast majority of searchers are not doing off-market search at all.
• 5:12
  SPEAKER_01: And so they'll get disproportionate outcomes just by doing the basics, just by, you know, using you know publicly available web scrapers through something like uh appify.com, or using um, you know, you know, like sourcing through the LinkedIn, sourcing, uh, doing Apollo scrapers.
• 5:29
  SPEAKER_01: Um, if you've got access to sales tools like play, or or if you've got money and you want to pay for Invent and Grata, that's great too.
• 5:36
  SPEAKER_01: But the point is you got to build a list.
• 5:38
  SPEAKER_01: You got to be able to clean up that list, deduplicate that list, get emails, get physical addresses, get phone numbers, get social media accounts, whatever you can do.
• 5:45
  SPEAKER_01: And then it comes down to outreach at a scale that is 10 times higher than most searchers realize.
• 5:51
  SPEAKER_01: Like you need to be sending tens of thousands of cold emails done the right way.
• 5:55
  SPEAKER_01: Done the wrong way is the stuff we see in our inbox all the time, where it's like, hello, name in curly brackets, you know, or just go straight to your junk box or you know.
• 6:04
  SPEAKER_01: But when you know how to do it the right way, you can get responses.
• 6:07
  SPEAKER_01: One to two percent reply rate is pre-standers.
• 6:09
  SPEAKER_01: And then on top of that, you're doing cold calling, you're doing social media DM, you're writing letters, they're doing whatever you got to do, attending physical conferences to add as much leverage as possible to your off-market search while also doing the stuff that most searchers are already doing, which is the on-market networking.
• 6:25
  SPEAKER_01: Yeah, both those things combined.
• 6:27
  SPEAKER_01: That's how you actually search.
• 6:28
  SPEAKER_05: It sounds a lot like being a real commercial real estate broker.
• 6:31
  SPEAKER_05: There's a lot of cold calling in our industry.
• 6:33
  SPEAKER_05: I I don't really cold call at all, but you know, mine's mainly relationship-based.
• 6:38
  SPEAKER_05: But, you know, I get it.
• 6:40
  SPEAKER_05: You know, there was a point in my career where I did a lot of cold calling.
• 6:43
  SPEAKER_05: So and uh it's part of it.
• 6:46
  SPEAKER_05: You know, the thing about AI is I sit here and I'm like hoping you have this secret sauce where Claud has totally automated it.
• 6:55
  SPEAKER_05: But what people have to realize is eventually a human has to pick up the phone.
• 7:00
  SPEAKER_05: What you guys do is make it 10 times faster and make them 10 times more successful, but you have to pick up the phone eventually and be the one to make that call.
• 7:11
  SPEAKER_01: So you know, you're you're nailing it right on the head.
• 7:13
  SPEAKER_01: Like you have to be able to generate on the youth so you can have an at-bat.
• 7:16
  SPEAKER_01: But that's all it is.
• 7:17
  SPEAKER_01: It's just an at-bat.
• 7:18
  SPEAKER_01: It's an at-bat.
• 7:19
  SPEAKER_01: There you go.
• 7:20
  SPEAKER_01: What I've yeah, what I've found is that, you know, it's good to have those at bats, but I don't mind giving away the secret sauce because what you're looking for is not what I'm looking for.
• 7:29
  SPEAKER_01: Yeah, like we're not looking for the same stuff.
• 7:31
  SPEAKER_01: And in the rare circumstance that you are also looking at GovCon and you're also looking at the company I'm looking at, I'm willing, I am willing and able to take the bet that I'm gonna win that deal over you just because that's that's what I'm good at.
• 7:44
  SPEAKER_01: I'm good at having those types of conversations.
• 7:46
  SPEAKER_05: We can just partner that way.
• 7:49
  SPEAKER_05: Exactly.
• 7:49
  SPEAKER_05: All together, it's cheaper.
• 7:51
  SPEAKER_05: You only have to buy half.
• 7:53
  SPEAKER_05: Yeah, yeah, exactly.
• 7:54
  SPEAKER_05: We'll split the market, we'll be fine.
• 7:56
  SPEAKER_05: There you go.
• 7:57
  SPEAKER_05: Um, so how do you let me ask you this?
• 7:59
  SPEAKER_05: I want to steer off.
• 8:00
  SPEAKER_05: How how did you get into government contracting?
• 8:03
  SPEAKER_05: That's actually where my bread and butter is.
• 8:05
  SPEAKER_01: So the better question is how I ever found myself buying a landscape council.
• 8:09
  SPEAKER_01: Um but I spent 10 years on active duty in the Air Force, all in financial management and acquisition, um, starting off at base level all the way up to the Pentagon by the time I got out.
• 8:19
  SPEAKER_01: And so I got out in January of 19.
• 8:21
  SPEAKER_01: So I know government financial management and acquisition very well.
• 8:25
  SPEAKER_01: And so that's where I felt the most comfortable.
• 8:27
  SPEAKER_01: Um when I got out, did my MBA at NYU Stern and started working in big tech, uh, mostly for Microsoft, doing software engineering, uh building up the Jedi Cloud when all that was big, like on the top secret sides.
• 8:38
  SPEAKER_01: Yeah, did that for several years.
• 8:40
  SPEAKER_01: But while doing that and wrapping up my MBA, I uh was exposed to ETA.
• 8:46
  SPEAKER_01: That's how I kind of got into existence.
• 8:48
  SPEAKER_01: And one of the fundamental flaws I made early on, because you know, we only know what we know.
• 8:52
  SPEAKER_01: Like we can, you know, I can't make decisions based on information I don't have.
• 8:55
  SPEAKER_01: Yeah.
• 8:56
  SPEAKER_01: And when I was a brand new searcher, I thought the amount of capital I had for a deal was limited to the SBA 7A program.
• 9:04
  SPEAKER_02: Yeah.
• 9:04
  SPEAKER_01: And so I came into it thinking, man, I'm gonna buy a gov a government contracting firm, I'm gonna find something in in software or IT management, or maybe even in like procurement or something like that.
• 9:14
  SPEAKER_01: Uh, that's where I felt the most comfortable.
• 9:16
  SPEAKER_01: And I was, you know, first time, so not a great searcher.
• 9:19
  SPEAKER_01: I'm learning everything on the go.
• 9:21
  SPEAKER_01: And uh this was 21, 22.
• 9:23
  SPEAKER_01: So like this was before buying a business online was cool.
• 9:26
  SPEAKER_01: Like, yeah, there was no, it really wasn't Cody Sands.
• 9:29
  SPEAKER_01: It was just the it was just the HBR guide, walk a divos, buy them build, and three ETA conferences, Harvard, Chicago, and Stanford.
• 9:37
  SPEAKER_01: And you couldn't go to Stanford.
• 9:39
  SPEAKER_01: And so I went to both Harvard and Chicago.
• 9:41
  SPEAKER_01: And so that's all I had, had to learn a lot from scratch, you know, learned a lot just DMing a lot of successful searchers um on LinkedIn.
• 9:48
  SPEAKER_01: But the problem I ran into is I realized that, you know, from what I was looking for at the time, I didn't think I could close a GovCom company.
• 9:56
  SPEAKER_01: And so I started defaulting into what other industries are available?
• 9:59
  SPEAKER_01: And I went through several, finally landing on landscaping, finally acquiring a landscaping company.
• 10:04
  SPEAKER_01: And that's kind of how I got to that portion.
• 10:06
  SPEAKER_01: But make no mistake, government contracting, financial management, and even software, that's really where my bread and butter happens to be.
• 10:12
  SPEAKER_05: What kind of price point are we looking at?
• 10:14
  SPEAKER_05: Are you looking in like the$10 to$50 million range, or is it like three to five, or what are what are we looking for?
• 10:21
  SPEAKER_01: Generally speaking, I'm looking for things that are between two and ten million in Evo.
• 10:25
  SPEAKER_01: That makes the most sense.
• 10:26
  SPEAKER_05: Well, it's an easier capital raise, too.
• 10:28
  SPEAKER_01: I mean, it's, you know, can you put the capital together quicker and you know, so GovCon's a little bit of a special snowflake when it comes to capital raising.
• 10:38
  SPEAKER_01: Um, you're completely hamstrung by either the money you have personally or by the money you can raise.
• 10:44
  SPEAKER_01: And unlike other industries where I can just raise money from anybody who will give it to me, in GovCon, especially in that$10 to$50 million enterprise value range, yeah, the vast majority of money I have to raise has to come from an SBIC.
• 10:56
  SPEAKER_01: And that's because GovCon, specifically in this size category, they tend to have a lot of small business set-aside issues.
• 11:03
  SPEAKER_01: And SBICs are the only structure legally that don't lose that set-aside.
• 11:08
  SPEAKER_05: Let me ask you this for my audience.
• 11:10
  SPEAKER_05: What is a SBIC?
• 11:12
  SPEAKER_05: Spell that out.
• 11:13
  SPEAKER_03: Yeah.
• 11:14
  SPEAKER_01: Great question.
• 11:15
  SPEAKER_01: Uh, small business investment company.
• 11:17
  SPEAKER_01: And so the long and short of it is an SBIC is nothing more than a standard private equity firm.
• 11:23
  SPEAKER_01: That's all it is.
• 11:24
  SPEAKER_05: So is it just a way of setting up so you're more distinct?
• 11:28
  SPEAKER_05: It's not a partnership.
• 11:29
  SPEAKER_05: It becomes like a 506C and it's like officially a security.
• 11:34
  SPEAKER_05: Is that what the SBIC does?
• 11:36
  SPEAKER_05: No, it's um Is that too legal for us to discuss?
• 11:39
  SPEAKER_05: I mean, it's all I mean.
• 11:41
  SPEAKER_01: Not at all.
• 11:42
  SPEAKER_01: But I think this is important because I think um, especially searchers who are interested in this space, you know, knowing the details is important because we're never gonna be able to dive into all the details, but you can go and Google them on your own.
• 11:52
  SPEAKER_01: But yeah, SBIC, um, it was specifically designed to allow it to encourage private equity firms to invest in lower middle market companies.
• 12:00
  SPEAKER_01: Because you can imagine if I'm running a company that's got$300 million of assets under management, buying a$12 million government contractor company doesn't really move the needle simpler.
• 12:09
  SPEAKER_01: And so the SBA back in the 50s said, all right, what can we do to encourage private equity to invest in small business?
• 12:16
  SPEAKER_01: And for these purposes, we meant you know 10 to 60 million total enterprise value.
• 12:21
  SPEAKER_01: And what they came up with was they tell the private equity firm, hey, you go raise money.
• 12:26
  SPEAKER_01: And once you raise money, um, we will give you twice as much money as you raised in cheap debt.
• 12:32
  SPEAKER_01: So if you raise$50 million, you get your$50, but we'll also give you$100 million in federal fund rate level debt that you can use.
• 12:40
  SPEAKER_01: So you've basically amplified your returns like really big.
• 12:43
  SPEAKER_03: Yeah.
• 12:44
  SPEAKER_01: But the but the catch is that that that allows you to be SBIC certified.
• 12:49
  SPEAKER_01: The catch, though, is that you have to report everything to the SBA, you know, so you have annual reporting.
• 12:53
  SPEAKER_01: And then the other catch is that you can only buy companies that are within that small business set-aside space.
• 12:59
  SPEAKER_01: So, like for the most part, it's like that that 10 to 50, 10 to 60 million dollar revenue kind of space.
• 13:05
  SPEAKER_05: Yeah, that's very interesting.
• 13:07
  SPEAKER_05: Thank thank you for covering that.
• 13:09
  SPEAKER_05: Uh, I have a lot of listeners that come from you know real estate where we're used to dealing with 506Cs, 506Bs.
• 13:16
  SPEAKER_05: So if you go into the smaller stuff, is that just like a standard 506C or 506B, probably, right?
• 13:23
  SPEAKER_01: Oh, yeah, yeah.
• 13:24
  SPEAKER_01: So, yeah, exactly right.
• 13:26
  SPEAKER_01: These structures are largely the same.
• 13:28
  SPEAKER_01: Um, it just depends on how you're raising that capital.
• 13:30
  SPEAKER_01: 506Bs has been, you know, that's been the standard for a long time.
• 13:34
  SPEAKER_01: Um, 506Cs are getting more and more popular with people who realize that they can raise money online, you know, as long as things are trended investors.
• 13:42
  SPEAKER_01: And so, you know, you'll still notice those SBICs are almost always 506Bs.
• 13:47
  SPEAKER_01: They're all pretty institutions, right?
• 13:49
  SPEAKER_01: Yeah.
• 13:49
  SPEAKER_01: And uh what will happen though is, you know, they get this big leverage bump to be able to invest in small businesses.
• 13:55
  SPEAKER_01: Um, they get that advantage.
• 13:57
  SPEAKER_01: And then, you know, the key thing though, especially for GovCon, is that by taking money from an SBIC because of this, because of its uh specific characteristics, as a government contractor, I don't immediately lose small business set-aside privileges, which is really big.
• 14:13
  SPEAKER_01: It's uh critical for most government contracting small devices.
• 14:17
  SPEAKER_05: Yeah.
• 14:19
  SPEAKER_05: Um, let's um I kind of want to shift.
• 14:22
  SPEAKER_05: You know, a lot of what I'm seeing is, you know, people on the real estate in real estate make the mistake of going too small by like doing like a little rental house where they should have gotten partners and gone bigger and just bought an apartment complex or you know, a strip center, something else to where, you know, but uh sounds like you did that.
• 14:43
  SPEAKER_05: So you did the landscaping thing and you didn't do well.
• 14:47
  SPEAKER_05: It was a bad experience.
• 14:49
  SPEAKER_05: And I hear you talk a lot, and you and you know, you're I can tell you're a really smart guy, software engineer, MBA.
• 14:58
  SPEAKER_05: You know, I'm I'm a smart guy too.
• 15:00
  SPEAKER_05: And you know, like I was telling Nate Lindley, it's like there's always something you're gonna miss just because we're human and the emotion that you go through when you buy a business, you're either really excited or you're really hyper-focused on like the financials only and not paying attention to the operations.
• 15:19
  SPEAKER_05: There's just there's so much to it, and you've never done it before.
• 15:23
  SPEAKER_05: And it's also an industry you don't understand.
• 15:27
  SPEAKER_05: And it's like, you know, having you as a coach and a mentor that can say, watch out for this, and you've done it more times than others.
• 15:36
  SPEAKER_05: I mean, what have you learned from you know your failure that has, you know, what are you looking for?
• 15:44
  SPEAKER_05: Um, you know, yeah, when you buy something now.
• 15:47
  SPEAKER_01: Really great question.
• 15:48
  SPEAKER_01: I uh I learned so much.
• 15:50
  SPEAKER_01: I I feel like uh, you know, my experience with uh landscaping company was like in a lot of ways, the you know, acquisition entrepreneur capstone to my MBA.
• 15:59
  SPEAKER_01: I feel I got uh like I feel like I got a decade of wisdom in like six months.
• 16:03
  SPEAKER_01: Uh in reality, it was more like two and a half years.
• 16:06
  SPEAKER_01: Um but the key things, you know, again, like I said, you just don't know what you don't know.
• 16:11
  SPEAKER_01: And so so many things I would I would tell first-time searchers.
• 16:14
  SPEAKER_01: Um, but I would always start off with uh surround yourself with a professional business.
• 16:18
  SPEAKER_01: You know, find, you know, surround yourself with people who have done this before.
• 16:22
  SPEAKER_01: And so if you're a solo searcher, if you're a paired team, you know, find a lawyer who absolutely just does this.
• 16:27
  SPEAKER_01: All they do is small business acquisitions.
• 16:29
  SPEAKER_01: You're finding a quality of earnings professional, and all they do is small business Q of E work, right?
• 16:34
  SPEAKER_01: It's not something they do on the side, uh, you know, alongside like their tax advisory.
• 16:38
  SPEAKER_01: Like, let's find people who actually do the work.
• 16:40
  SPEAKER_01: And then you know, I'll also tell you, you can only do what you believe you can do.
• 16:46
  SPEAKER_01: And so I thought as a self-funded surgery, that you know, my um my limit was the SBA program.
• 16:51
  SPEAKER_01: That's what I thought my limit was.
• 16:53
  SPEAKER_01: And so I also didn't know that I could raise capital.
• 16:57
  SPEAKER_01: And to be honest with you, I even if I did, I definitely did not have the confidence to do it.
• 17:01
  SPEAKER_01: And that's why you said, you know, a lot of people say, you know, real estate, you start off with like, you know, one or two doors and eventually get to like 30 and 100 and get like grant card on levels of like apartment buildings and stuff.
• 17:10
  SPEAKER_01: And what I have discovered is that the entire market is available to you if you know how to do it.
• 17:16
  SPEAKER_01: And so a lot of um, a lot of first-time buyers, especially on the independent sponsor side, they realize that like, oh, I actually can raise$50 million to go do a diesel.
• 17:26
  SPEAKER_01: I really can.
• 17:27
  SPEAKER_03: Yeah.
• 17:27
  SPEAKER_01: It really comes down to how good the deal is, how good you are as a sponsor, and what kind of structure you can put together.
• 17:34
  SPEAKER_01: You can do those things, there's plenty of capital on the sidelines, as long as you know how to go get it.
• 17:37
  SPEAKER_01: And uh, you know, a lot of that really just begins with, you know, number one, your awareness, and then number two, your confidence in yourself to actually do it.
• 17:45
  SPEAKER_01: Um you know, I somebody left a comment on one of my posts last week where they made this comment about um, you know, the amount of capital you can raise is directly proportional to the your ability to raise it.
• 17:56
  SPEAKER_01: That's it sounds a little, you know, circular, but it's absolutely true.
• 18:00
  SPEAKER_01: Like I can get on a phone call right now.
• 18:02
  SPEAKER_01: Like I don't have a committed fund.
• 18:04
  SPEAKER_01: I don't have a hundred million dollars for the bank, but I can get on a phone call right now and have a serious conversation with a seller who runs an enterprise value company at$50,$60 million, and in complete conviction tell you that I can raise that money in the next 90 days if we go under LOR.
• 18:18
  SPEAKER_01: And I know I can do it.
• 18:19
  SPEAKER_01: And that's the level of confidence you need to be able to do it.
• 18:22
  SPEAKER_01: And the vast majority of searchers, if you've never done that, you're not gonna be able to do that on its own, much less inclusive.
• 18:27
  SPEAKER_05: I I think there's some truth, and you see it in different businesses.
• 18:32
  SPEAKER_05: In, you know, it's like at certain times, raising money for oil is real easy, at other times, raising it in real estate.
• 18:41
  SPEAKER_05: But it's like that investor appetite, you know, if the deal makes sense, there's unlimited capital you can raise.
• 18:49
  SPEAKER_05: But I what I see a lot of is people have success, say in one niche, raising money, and then the market shifts for whatever reason, the economics don't make sense, and they're still trying to raise money on it, and you're like, you have to adjust, and it's and it's tough, you know.
• 19:06
  SPEAKER_05: Everything has different cycles, and I'm not just a fair weather fan, but at the end of the day, it's like I don't like to sit there and struggle, you know.
• 19:16
  SPEAKER_05: So um knowing what will sell to investors, and that gives you all the confidence in the world is when you know you have a good deal and a good product.
• 19:26
  SPEAKER_01: Um, and you also have to know that, like, you know, there are some things that are beyond your control.
• 19:30
  SPEAKER_01: So we uh my team and I we were raising capital for a government contracting firm last fall, and it was a stellar firm.
• 19:38
  SPEAKER_01: It was exactly what you would want to see, like uh no customer concentration, which is wild.
• 19:42
  SPEAKER_01: You know, like I would say, you know, for government contracting, I would say it's low government uh customer concentration.
• 19:49
  SPEAKER_01: Um, we had visibility on 60% of the revenue for the next five years.
• 19:52
  SPEAKER_01: Uh, we were doing classified work.
• 19:54
  SPEAKER_01: It was right in the middle of the government shutdown, if you remember last falls.
• 19:57
  SPEAKER_01: And this team was, you know, doing classified work, so they're still working, even got paid during the during the shutdown.
• 20:02
  SPEAKER_01: And I was thinking, from my experience, I'm telling investors like this is a slam dunk.
• 20:07
  SPEAKER_01: We're getting this thing at an incredible enterprise value.
• 20:10
  SPEAKER_01: Um, and if you ever wanted to see what the worst case scenario looks like, look right now.
• 20:14
  SPEAKER_01: This is it.
• 20:15
  SPEAKER_01: This is the worst it could ever possibly be.
• 20:17
  SPEAKER_01: I think it is still making money.
• 20:18
  SPEAKER_05: About that, yeah.
• 20:19
  SPEAKER_05: The government shutdown and it's still paid during the shutdown.
• 20:23
  SPEAKER_01: That's pretty good, man.
• 20:24
  SPEAKER_01: Here's the crazy thing, Carson.
• 20:26
  SPEAKER_01: We were able to raise money on that deal, but we couldn't close.
• 20:29
  SPEAKER_01: And it came down to investors having cold food.
• 20:31
  SPEAKER_01: And so you can still have the best deal in the world at the best time in the world, and it cannot work out.
• 20:37
  SPEAKER_01: And um, you know, and that's sometimes that's what happens, yeah.
• 20:40
  SPEAKER_01: And so you have to just be prepared for that.
• 20:42
  SPEAKER_01: Um your best throat forward and see what you can do.
• 20:45
  SPEAKER_05: Yeah, I love it, man.
• 20:47
  SPEAKER_05: So, you know, going back to I I see you posting about it, and I know you've talked about it in your experience, like, you know, shady owners and you know, the the QE.
• 21:01
  SPEAKER_05: Um the so for listeners from different uh industries, QE is quality of earnings uh check on a company.
• 21:09
  SPEAKER_05: Um QE comes back good, it looks good, and then the company's just bunk, something's wrong.
• 21:17
  SPEAKER_05: You know, and you talk a lot about shady owners.
• 21:20
  SPEAKER_05: What are some examples you've seen of oh yeah, so many.
• 21:24
  SPEAKER_01: And I'll I'll like I'll tell you, there's no way you can remove risk from a DA.
• 21:29
  SPEAKER_01: There's always going to be risk.
• 21:30
  SPEAKER_01: So what you're doing during diligence is you're trying to mitigate as much risk as possible.
• 21:34
  SPEAKER_01: Because, you know, a quality of earnings is only as good as the person doing equality earnings, and it's only as good as the data that they have.
• 21:41
  SPEAKER_01: And same thing's true for legal, same thing's true for operational, same thing's true for technical diligence.
• 21:45
  SPEAKER_01: And so even if you've got the best team and the most capital and you do all the research you possibly can, you're never going to be real able to remove all the risk because there's always gonna be information asymmetry that the owner has that you don't have.
• 21:57
  SPEAKER_01: And so at some point, you still have to be able to take the The problem though is when you don't take all those steps to mitigate all that risk, and instead you just leap anyway.
• 22:07
  SPEAKER_01: That's really where people get themselves in trouble.
• 22:10
  SPEAKER_01: And you know, since my business failed, um, you know, it's funny because like we're online, we see all the wins and we see all the successes, and I love that.
• 22:18
  SPEAKER_01: I want success for everybody.
• 22:19
  SPEAKER_01: Um however, we don't see the failures.
• 22:22
  SPEAKER_01: And even though we know it's not true, even though I knew inside that it wasn't true, um, I felt like I was the only person who had ever bought a company and then it failed, you know?
• 22:32
  SPEAKER_01: And uh not just failing, you know, it does happen that way.
• 22:35
  SPEAKER_01: It feels that way.
• 22:36
  SPEAKER_01: It feels that way.
• 22:37
  SPEAKER_01: Yeah.
• 22:38
  SPEAKER_01: And what happened is I just started, you know, posting on LinkedIn about how, you know, some of the things I had learned and some of the things I was going through.
• 22:45
  SPEAKER_01: And one by one, people started DMing me directly, like, yeah, that totally happened to me.
• 22:48
  SPEAKER_01: Hey, this happened to me.
• 22:49
  SPEAKER_01: And that turned into conversations and phone calls.
• 22:52
  SPEAKER_01: And at this point, I've interviewed over a hundred people who have bought a business in the last five years and experienced a failure.
• 22:58
  SPEAKER_01: And so it's certainly not enough data to say, hey, I know the industry, but it's enough um anecdotal data to say I can definitely see some trend lines.
• 23:06
  SPEAKER_01: And a few of those trend lines are about 60% of those situations had some sort of direct seller fraud in buyers.
• 23:12
  SPEAKER_01: And so one of the, like you said earlier, a lot of times, you know, especially the first-time buyer, we're really, really focused on the financials.
• 23:19
  SPEAKER_01: And that's important.
• 23:20
  SPEAKER_01: Financials are the business in a lot of ways.
• 23:22
  SPEAKER_01: Yeah.
• 23:22
  SPEAKER_01: But what I've realized now is that the financials are simply the the what gives you the ability to sit down at the table and see if there's a deal.
• 23:29
  SPEAKER_01: Financials open the door.
• 23:30
  SPEAKER_01: That's it.
• 23:31
  SPEAKER_01: The rest of it is the owner and the operations of the business.
• 23:35
  SPEAKER_01: And the seller is always the number one risk in every single deal because you know that it's just this the business, a small business is a direct reflection of its own.
• 23:44
  SPEAKER_01: And if the owner cannot be trusted, the business cannot be trusted.
• 23:47
  SPEAKER_01: And so the real question comes down to when you're doing diligence with a with the owner, it is is this somebody who has integrity?
• 23:53
  SPEAKER_01: Is this someone who can be trusted?
• 23:55
  SPEAKER_01: It doesn't mean that like they're your buddy, they're your pal.
• 23:57
  SPEAKER_01: So you got you want to have like Sunday dinner with them, but it does mean do they operate their business their business in a manner that shows integrity?
• 24:05
  SPEAKER_01: Do they treat their employees well?
• 24:07
  SPEAKER_01: Do they have a positive work culture?
• 24:08
  SPEAKER_01: Do they pay their bills on time?
• 24:10
  SPEAKER_01: Um do they have like, do they have positive or negative uh recommendations from other people in town?
• 24:16
  SPEAKER_01: One of the things I've discovered was that a lot of these industries, you know, think of like roofing or fencing or landscaping.
• 24:22
  SPEAKER_01: A lot of them, they all get their supplies from the same, you know, two or three suppliers.
• 24:26
  unknown: Yeah.
• 24:27
  SPEAKER_01: And what happens is a lot of those suppliers are already rolled up, right?
• 24:29
  SPEAKER_01: They're already private equity backed and everything else.
• 24:31
  SPEAKER_01: And so all these like mom and pop shops are all getting their safe supplies from, you know, two or three different suppliers, all corporate backed.
• 24:37
  SPEAKER_01: So the corporate backed suppliers have no skin in the game.
• 24:39
  SPEAKER_01: They'll just talk, they'll gossip all day.
• 24:41
  SPEAKER_01: And it's funny.
• 24:42
  SPEAKER_01: I'll just show up, I'll show up at a supplier and like, hey, I'm looking to get like some remodeling done.
• 24:47
  SPEAKER_01: Who would you recommend?
• 24:48
  SPEAKER_01: And they'll start, and I've already done my diligence.
• 24:50
  SPEAKER_01: I know who the companies are in the space.
• 24:51
  SPEAKER_01: And they'll start rattling off a few names and I'll start like mentally thinking, okay, does that correlate with what I have?
• 24:57
  SPEAKER_01: And then obviously I've got one or two in my mind.
• 24:59
  SPEAKER_01: And I was like, well, what do you think of like X, Y, and Z firm?
• 25:01
  SPEAKER_01: And their response will tell you everything you need to know.
• 25:04
  SPEAKER_01: Like, do they have a positive reputation?
• 25:06
  SPEAKER_01: Is that something you would recommend me working with?
• 25:08
  SPEAKER_01: Um, are they somebody that you know their employees they're always hiring because their employees keep quitting and going to their competitors because they just have a toxic work environment?
• 25:15
  SPEAKER_01: Like yeah, people love to talk.
• 25:17
  SPEAKER_01: And if you give them a chance to talk, they'll tell you everything you need to know.
• 25:20
  SPEAKER_01: And that's a wonderful way to find out like the culture.
• 25:24
  SPEAKER_05: Yeah, I love that.
• 25:25
  SPEAKER_05: So I wrote a little book, but it's kind of different, it's based different than yours.
• 25:29
  SPEAKER_05: It's like I start off because one of the businesses I talked about that I got into in that J curve is negotiating the lease.
• 25:37
  SPEAKER_05: Like Sam Walton effed up the lease, you know.
• 25:41
  SPEAKER_05: And, you know, like all the built-in increases, signing up to be personally liable.
• 25:47
  SPEAKER_05: But in my book, right, it's a little airport guide, man.
• 25:50
  SPEAKER_05: I wrote a real estate book that's like 300 pages and it was like impossible.
• 25:54
  SPEAKER_05: But this is the red flag playbook, like buying and selling businesses.
• 25:58
  SPEAKER_05: But in that little book, I talk about a lot about what you're talking about is hey, call one of their call somebody in that industry and ask them, like, are these people like worth a crap?
• 26:11
  SPEAKER_05: You know, because they'll tell you, especially like a competitor's always gonna talk bad, but they'll say, Well, I don't know if it's a bad person, you know, they're probably good people, but we do a better job.
• 26:21
  SPEAKER_05: If that's all they say, it's okay.
• 26:23
  SPEAKER_05: That's that's a competitor talking.
• 26:25
  SPEAKER_05: But if they say, Yeah, they went around town screwing everybody, that's different, you know, if they're unethical.
• 26:32
  SPEAKER_05: But I think, you know, there's so much that they can pull with like the non-compete and you know, have a family member setting up on the side, and you don't people discount how relationship-based businesses are.
• 26:46
  SPEAKER_05: And like a lot of the a lot of their clientele and customers were built off relationships, even if they do a bad job is another thing I talk about in my book.
• 26:56
  SPEAKER_05: Like, you so say if there's a gym that's poorly run and you're like, oh, we could buy that and clean it up and turn it around.
• 27:03
  SPEAKER_05: Well, the managers still form relationships with the customers, so there's still going to be a drop in in you know, clientele, no matter what, you know.
• 27:14
  SPEAKER_05: I mean, it it there's always that J curve dip no matter what type of business it is.
• 27:20
  SPEAKER_05: So, like I I say you have to plan on the J-curve no matter what business it is.
• 27:26
  SPEAKER_05: You know, just because they don't like you, it's like well, you're not Ed or whoever the person was, you know.
• 27:32
  SPEAKER_05: So, but I think what you're talking about is great advice to check the character, because it's like, you know, there's usually skeletons in the closet.
• 27:40
  SPEAKER_05: You know, if they're if they're an unethical person, there's people will talk.
• 27:45
  SPEAKER_05: They'll be like, oh yeah, you need to run.
• 27:48
  SPEAKER_01: So they can't help it.
• 27:50
  SPEAKER_01: People they they are who they are, and so they act in that manner.
• 27:53
  SPEAKER_01: Um yes, for a few specifics.
• 27:56
  SPEAKER_01: Um, one of the other key lessons is that if you've never bought a company and you're kind of and you're new to the space, at least from an operational acquisition perspective, um, you most people have this idea that the legal system is there to protect you.
• 28:09
  SPEAKER_01: There are actual rules, there's guidelines, and if you jump outside those rules, uh then the court's gonna swoop in and save you.
• 28:15
  SPEAKER_01: And that could not be further from the truth.
• 28:17
  SPEAKER_01: And a lot of buyers, yeah.
• 28:20
  SPEAKER_01: You're right.
• 28:20
  SPEAKER_01: And a lot of buyers experience this the hard way.
• 28:22
  SPEAKER_01: And so what I mean by that is um, you know, especially from a legal perspective, you absolutely need to do everything you possibly can to make sure that your purchase agreement is, you know, rock solid, you have fantastic legal teams for everything you're doing.
• 28:35
  SPEAKER_01: But what you're really buying is legal insurance.
• 28:38
  SPEAKER_01: Because the only reason any of that stuff matters is if you ever get to a litigation or some sort of um contentious negotiation.
• 28:44
  SPEAKER_01: That's the only reason it mounts.
• 28:45
  SPEAKER_01: It gives you a platform to take legal action.
• 28:48
  SPEAKER_01: That's what counts.
• 28:49
  SPEAKER_01: And here's the problem, though.
• 28:51
  SPEAKER_01: If the opposing party, in this case the seller, decides to break their purchase agreement contract or more than likely, you know, infringe on the non-compete clause or something like that, then the only resource you have is to either try to, you know, um resolve the dispute directly with the seller, which usually does not go well, or bring in some sort of legal action.
• 29:11
  SPEAKER_01: And what happens is that legal action is incredibly expensive, it takes a very long time, and there is no guarantee you're gonna win.
• 29:18
  SPEAKER_01: And while you're trying to figure that out, uh you're also dealing with the negative impact of whatever happened that led you to take legal action to begin with.
• 29:25
  SPEAKER_01: So it's a double-edged sword.
• 29:27
  SPEAKER_01: Yeah, and even if you do get to the point nine or 12 months down the road where you actually get a, let's say you get a judgment in your favor, well, that's great.
• 29:34
  SPEAKER_01: But we also know that 70% of civil judgments never get collected.
• 29:37
  SPEAKER_01: So you're probably not gonna actually collect any of them.
• 29:39
  SPEAKER_01: So you're just screwed.
• 29:41
  SPEAKER_01: And I've unfortunately I've had this conversation with several, you know, buyers who kind of skimped on legal or just had a really bad experience and they're like, I'm trying to decide if it's worth suing.
• 29:51
  SPEAKER_01: And nine times out of ten, it's not.
• 29:53
  SPEAKER_01: It's just worth, you know, wiping your hands and walking away because it's just there's nothing to say, there's nothing to say.
• 30:00
  SPEAKER_05: Yeah.
• 30:01
  SPEAKER_01: And if there's something criminal, you can always refer them to the district attorney.
• 30:04
  SPEAKER_01: But beyond that, there's really not a whole lot you can do.
• 30:08
  SPEAKER_05: What what percentage of lawsuits do you think you know actually result in some sort of damages collected?
• 30:15
  SPEAKER_05: Probably like 10% or less.
• 30:17
  SPEAKER_05: I don't know.
• 30:18
  SPEAKER_01: I I have no idea, but I have to imagine it's very small.
• 30:21
  SPEAKER_01: Yeah.
• 30:21
  SPEAKER_01: And and again, not a lawyer.
• 30:24
  SPEAKER_01: I don't do this for a living.
• 30:25
  SPEAKER_01: Um, so the right answer is I have no idea.
• 30:28
  SPEAKER_01: Yeah, but I can tell you from uh I was just curious and a donal experience, I'd imagine it's very small.
• 30:34
  SPEAKER_01: Because most of the time you're never gonna get to that settlement.
• 30:38
  SPEAKER_01: And most of the time you're never actually gonna get to a final judgment.
• 30:41
  SPEAKER_01: And then even if you did, that all just negate that just matters if the other person actually has the funds to actually settle, which most time they don't.
• 30:48
  SPEAKER_01: Yeah.
• 30:48
  SPEAKER_01: Um so here's one story.
• 30:50
  SPEAKER_01: I know uh a gentleman who bought a company, it was um a million-dollar purchase price, and he paid almost completely in cash.
• 30:57
  SPEAKER_01: He decided that's what he wanted to do.
• 30:58
  SPEAKER_01: He had a significant amount of savings, along with um, he was able to take out a loan against his investments, against his stock performance, um, which from a return investment was actually fantastic.
• 31:09
  SPEAKER_01: He got a really low rate, it was really great.
• 31:10
  SPEAKER_01: Um, I still would have encouraged him to take a little bit of leverage as well, but it's what he wanted to do.
• 31:15
  SPEAKER_01: He paid somewhere north of$900,000 at close with another like$200,000 on a seller's day.
• 31:21
  SPEAKER_01: So the seller took that money, and then three months later, he finds out that there was actual material fraud in the business.
• 31:26
  SPEAKER_01: Um directly the point of like what they said they were doing was not what they were doing.
• 31:30
  SPEAKER_01: And so their whole job was, you know, to um basically replace this part with a supplier's part and get a piece of the action on that.
• 31:39
  SPEAKER_01: And what they were doing is that every time they replaced a part, they were actually replacing it with a very, very cheap version of that part, but then billing as if it was the premium part.
• 31:46
  SPEAKER_01: So it was actual direct fraud.
• 31:48
  SPEAKER_01: Yeah.
• 31:48
  SPEAKER_01: And uh he's been in litigation now six or seven months uh as of like last year.
• 31:54
  SPEAKER_01: I think we spoke last spring.
• 31:56
  SPEAKER_01: Um, but he was still in litigation for a while.
• 31:58
  SPEAKER_01: And the likelihood that he was going to be able to recoup that money is incredibly low.
• 32:03
  SPEAKER_01: Because, you know, in the meantime, like, yeah, the seller can spend it, the seller can use it in some other way, and sure, that could be a misappropriation of funds, especially during litigation, and they probably don't care.
• 32:14
  SPEAKER_05: I I think that brings up another point about, you know, when you bring in investors and kind of raise the stakes a little bit and you spread the risk amongst more people.
• 32:25
  SPEAKER_05: I mean, do you find it that more people there's more probably fraud on the smaller deals versus the bigger ones?
• 32:34
  SPEAKER_05: Yeah.
• 32:34
  SPEAKER_05: Is that correct?
• 32:36
  SPEAKER_01: You know, you know, what I have learned is that most people in this space are not as smart as you think they are, right?
• 32:41
  SPEAKER_01: Yeah.
• 32:41
  SPEAKER_01: And so just because someone can whip up a financial model does not mean they're intelligent, uh, especially now with claw.
• 32:46
  SPEAKER_01: Yeah.
• 32:47
  SPEAKER_01: And so I had this big misconception that, like, oh, all the P analysts at these firms must be geniuses.
• 32:52
  SPEAKER_01: They all went to Whartons.
• 32:53
  SPEAKER_01: Um, yeah.
• 32:54
  SPEAKER_01: Then I realized, oh, okay, they're smart, sure.
• 32:56
  SPEAKER_01: But, you know, there are just as many people that I've interviewed who have MBAs from HBS and Stanford as don't have a college degree at all.
• 33:04
  SPEAKER_01: And so it happens to everyone.
• 33:06
  SPEAKER_01: But the problem you run into is that you absolutely need to have some level of expertise.
• 33:12
  SPEAKER_01: And if you do raise money, even at the ETA level, say you're doing an SBA level fund, you're raising like$400,000,$800,000 to bridge the equity gap.
• 33:21
  SPEAKER_01: You still have to, these are really good skills that you should lean into as a surgery, even if you're only gonna do it once, because they're valuable sales skills.
• 33:27
  SPEAKER_01: Like it if it requires you to put together a pitch deck, it requires you to actually sell your deal to someone else and you're encouraging them to pick it apart.
• 33:36
  SPEAKER_01: And by doing that, it's gonna expose flaws in your reasoning, flaws in in how you put together your model, uh, flaws in your perception of the weaknesses and the strengths of this business.
• 33:45
  SPEAKER_01: And then even if you decide to go ahead and buy it, well, at least you've got that level of feedback, which is gonna be excellent.
• 33:51
  SPEAKER_01: But you're right, the more people that look at it, the better.
• 33:53
  SPEAKER_01: Then the more uh direct feedback you have, and you know, hopefully the wisdom of crowds take over a little bit.
• 33:58
  SPEAKER_01: And I think that does make a lot of sense.
• 33:59
  SPEAKER_05: Yeah, I I think the smaller ones, they, you know, it it almost attracts crooks because it's like it's so small that they're like that they're not gonna pursue it, you know.
• 34:09
  SPEAKER_01: So it's so true.
• 34:10
  SPEAKER_01: I see this a lot where searchers, you know, and it it really is a um a mental growth perspective.
• 34:17
  SPEAKER_01: Like, and I don't mean that from an intelligent perspective, I mean it from like a uh like a confidence awareness perspective.
• 34:23
  SPEAKER_01: It's like they think that smaller means easier, or smaller means safer, or smaller means, you know, something I can actually put my hands around it and hand on, you know.
• 34:32
  SPEAKER_01: And I think that comes from the fact that like, you know, if you are able to own a home, then it's the most expensive thing you ever bought.
• 34:39
  SPEAKER_01: And it's probably, you know, two to four hundred grand.
• 34:41
  SPEAKER_01: That's probably what you bought.
• 34:42
  SPEAKER_01: Unless you live in California, it's like 800 grand or more or more, right?
• 34:45
  SPEAKER_01: So when you're stepping in the business acquisition world, this business is gonna be four, five, seven times more expensive than anything you've ever bought in your past.
• 34:52
  SPEAKER_01: And the fact that I can use the SBA loan and lever that thing up to$5 million for as little as$500,000 on my part means that most searchers don't want to try to raise capital.
• 35:01
  SPEAKER_01: They're, they don't know if they can do it, and they also just don't want to deal with it.
• 35:05
  SPEAKER_01: So they're like, all right, well, if I've got$100,000 in the bank, then I can buy a million dollar business and that's safe with it's I can do it all myself.
• 35:11
  SPEAKER_01: I don't need investors.
• 35:12
  SPEAKER_01: Um, but then you run into the same problem you run into with small business, which is the smaller business, the risk it goes.
• 35:19
  SPEAKER_01: And also you got nobody else, you know, looking over your deal, helping you out.
• 35:22
  SPEAKER_01: It's also why it's so important to have a very good deal team with you.
• 35:25
  SPEAKER_01: Just yeah, I've got a lot to say about risk mitigation.
• 35:29
  SPEAKER_05: So, you know, one thing you talk a lot about is that smaller business, you know, with the debt you bring in, it's you're personally on the personally liable on the hook.
• 35:41
  SPEAKER_05: So if that smaller business fails and you take out, you put down$100,000 and take out$900,000 with the SBA, and that business fails, you're basically, you know, they you lose your house, you lose everything.
• 35:54
  SPEAKER_05: Well, whatever's there in in each state, there's a little bit that's protected from bankruptcy laws, but you know, like you either get to pick, keep your 401k or your house, or and it's only to a certain amount, you know, you're allowed to keep a certain amount, but sometimes it takes you all the way down to like 50,000.
• 36:12
  SPEAKER_05: So that could, you know, pretty much wipe out a lot lifetime of you know work.
• 36:17
  SPEAKER_05: Um, you know, do you ever suggest people being personally liable and doing the SBA?
• 36:25
  SPEAKER_05: Are you like a hundred percent against it now, or how do you feel about it?
• 36:29
  SPEAKER_05: You know?
• 36:30
  SPEAKER_01: Yeah, so um I defaulted on a personal guarantee.
• 36:32
  SPEAKER_01: It wasn't with the SBA, but personal guarantees work the same way, regardless of how you sign them.
• 36:36
  SPEAKER_01: Well, yeah, true.
• 36:37
  SPEAKER_01: Yep.
• 36:38
  SPEAKER_01: What I can tell you is that, you know, first and foremost, you're you're exactly right.
• 36:41
  SPEAKER_01: You know, know the state you're in.
• 36:43
  SPEAKER_01: Every state is very different.
• 36:44
  SPEAKER_01: And what I find from a risk perspective is that the scariest thing is not knowing.
• 36:49
  SPEAKER_01: The scariest thing is staring down the dark tunnel of insolvency and not knowing what's on the other end of that.
• 36:54
  SPEAKER_01: And if you live in a state like Minnesota that has very good protections, you get to keep your home, you get to keep your retirement accounts.
• 37:00
  SPEAKER_01: You probably, if you have a family, you can keep your primary car.
• 37:02
  SPEAKER_01: Like, you know, the risk is not as high.
• 37:04
  SPEAKER_01: It sucks.
• 37:05
  SPEAKER_01: Like, don't get me wrong.
• 37:06
  SPEAKER_01: Yeah.
• 37:07
  SPEAKER_01: But it's not a state like Texas where they will wipe you out.
• 37:09
  SPEAKER_01: You'll start over from Snapchat.
• 37:11
  SPEAKER_01: And, you know, take it in the grain of salt.
• 37:12
  SPEAKER_01: I definitely don't know the rules in every state.
• 37:14
  SPEAKER_01: But one of the things you should do as a searcher right from the beginning is reach out to bankruptcy lawyers in your state and really get a good idea of what bankruptcy means for you.
• 37:23
  SPEAKER_01: You know, if you're planning on signing a first flight guarantee, I don't need to go in this with both eyes wide open.
• 37:28
  SPEAKER_01: Yeah.
• 37:29
  SPEAKER_01: As far as the um personal guarantee goes, though, yeah, I think the personal guarantee is totally fine as long as you find a business worth signing the guarantee for.
• 37:38
  SPEAKER_01: There is no program in the world like the 7A program that allows you to borrow 5 million bucks at a 500 grand, right?
• 37:47
  SPEAKER_01: It's just it's wild.
• 37:47
  SPEAKER_01: The level of leverage you can grow.
• 37:49
  SPEAKER_05: And then what is it that uh you can get up to a 25-year payback on it or what it payout loan?
• 37:54
  SPEAKER_05: Yeah.
• 37:55
  SPEAKER_01: Yeah, and if you combine, almost no one can, but if you combine with real estate, you can double that.
• 37:58
  SPEAKER_01: You know, you can get up to the SBA loan itself is amortized over 10 years.
• 38:02
  SPEAKER_01: And if you combine real estate with it, you know, with the purchase, you can push that to 20.
• 38:06
  SPEAKER_01: And I'm not an expert, definitely seek to talk to the SBA people about that, but yeah, um, it is an incredible amount of leverage with incredibly favorable returns.
• 38:14
  SPEAKER_01: The problem you run into though is that if you're a US citizen with a social security number and a heartbeat, you can basically qualify.
• 38:20
  SPEAKER_01: And if you can qualify, it's very easy to lever up, you know, to like a debt service coverage ratio that's less than one.
• 38:27
  SPEAKER_01: It's very easy to do that.
• 38:28
  SPEAKER_01: And all that means is that if your business, if the business you buy slumps by as little as 30%, you're insulved.
• 38:34
  SPEAKER_01: You're just screwed.
• 38:35
  SPEAKER_01: And even if it doesn't, it can put you in this weird zombie world where you have just enough money to keep the business alive, but not enough money to really grow it or expand it.
• 38:42
  SPEAKER_01: Because of the service.
• 38:44
  SPEAKER_01: Yeah.
• 38:44
  SPEAKER_01: And a lot of searchers really misunderstand the debt service.
• 38:47
  SPEAKER_01: You know, one of the people that I refer to all the time is um Joe Odell, wonderful uh uh traditional searcher, now owns a company in Dallas.
• 38:56
  SPEAKER_01: Uh, my partner on a prior deal.
• 38:58
  SPEAKER_01: Uh this guy, you know, he talks about the debt service very, very well.
• 39:02
  SPEAKER_01: He knows exactly what it means to take out a huge amount of debt.
• 39:05
  SPEAKER_01: And when everything looks good, it's great.
• 39:06
  SPEAKER_01: And then when things start slumping and things don't go the way you expected, now that debt is like an anvil wrapped around your neck.
• 39:12
  SPEAKER_01: Yeah.
• 39:12
  SPEAKER_01: And so it's just important to know that.
• 39:14
  SPEAKER_01: Um the last thing I'll say though about the personal guarantee is that small business is riskier than larger businesses.
• 39:23
  SPEAKER_01: That's why multiples expand as you go up.
• 39:25
  SPEAKER_01: Yeah.
• 39:25
  SPEAKER_01: If I'm looking at two companies, all things being equal, one company does a million dollars revenue, the other one does five, all things being equal, which is obviously they're not equal.
• 39:33
  SPEAKER_01: But if if that's the case, then it stands to reason that the$5 million business is probably a healthier bet.
• 39:39
  SPEAKER_01: It probably has a more diverse customer base, it's probably got better, c better uh employees, it's probably got a little bit of management included, it's probably got um, you know, there's a lot of things there to where if you mess things up within the first six, 12 months, it's probably not going to kill the business.
• 39:52
  SPEAKER_01: Whereas a 1 million revenue business, it's most likely one guy or gal with a team of 10 and one hiccup can kill the whole thing.
• 39:59
  SPEAKER_05: I talk a little bit about that in my book, is it's like there's more cushion for error, you know, the higher the revenue, it's like, okay, there's a manager in place and a bunch of other stuff, you know, you have more room to absorb problems, you know.
• 40:14
  SPEAKER_01: Well then think about it from the risk perspective too.
• 40:17
  SPEAKER_01: If I'm a risk, if I'm a first-time buyer and I've got the option between those two companies, and let's say I've only got$500,000 in net worth or accessible assets.
• 40:26
  SPEAKER_01: Like say it's like my home plus like$100,000 in the bank.
• 40:29
  SPEAKER_01: If that's what I've got, then for me, from a risk perspective, it makes no difference if I buy the$1 million company or the$5 million company.
• 40:36
  SPEAKER_01: Because if either one defaults, I'm screwed.
• 40:38
  SPEAKER_01: I'm bankrupt, right?
• 40:39
  SPEAKER_01: Yeah.
• 40:39
  SPEAKER_01: So from a risk perspective, I'm encouraged to go as big as possible.
• 40:42
  SPEAKER_01: Yeah.
• 40:43
  SPEAKER_01: So not only should I go bigger, but going bigger is actually safer.
• 40:47
  SPEAKER_01: So for the love of God, I can please do, you know, if all other things equal.
• 40:53
  SPEAKER_01: Like build a good deal team, make sure you're doing your proper diligence, but understand that bigger companies are safer bus.
• 40:59
  SPEAKER_01: Well, but the problem is, is nobody does that.
• 41:01
  SPEAKER_01: You know Yeah, everyone's like, I'm gonna buy this million-dollar business because I can live on$120,000 STE, which is just yeah, no, you can't.
• 41:10
  SPEAKER_05: If if everybody listened to it, it would be good advice.
• 41:13
  SPEAKER_05: I mean, it is great advice because everybody like they get into these businesses and you're just like, and they just become headaches anyway, because I don't know.
• 41:21
  SPEAKER_01: Yeah, there's just no telltale sign of a of a first-time buyer is they conflate STE with personal cash flows.
• 41:27
  SPEAKER_01: But they say, Oh, well, I'm looking for a company doing 500 grand in SDE, I'm gonna use the 7A loan, not realizing that the moment they buy the company, 260 grand of that goes directly to debt.
• 41:36
  SPEAKER_01: And now you've you're stuck with a SDE of about$240,000.
• 41:40
  SPEAKER_01: Oh, and now I got to pay myself and grow the company with that just that that little$240 grant.
• 41:45
  SPEAKER_01: So that SDE evaporates very quickly.
• 41:48
  SPEAKER_05: You know, one layer I want to add into the personal liability, like you know, my my book uh talks about the leases and signing up, and you can get into these leases where it's like five years of personal liability, and I don't think it I I I tell people so I've done multiple locations on different businesses, and like going in, I signed up for the personal liability, and then one of them started going south because of construction that was happening blocked the entrance.
• 42:20
  SPEAKER_05: And you know, building in provisions into those leases that kind of protect you, and you know, and you're sitting there going, well, I'm personally liable on an eight, eighty, five hundred dollar a month lease, you know, and then you look at it and you start calculating over a five-year period, it doesn't, you know, you're like, man, this is like half a million dollars that you're personally liable for on a lease.
• 42:41
  SPEAKER_05: And it's like, and then you think about it, some of those uh real estate landlords aren't even personally liable on the building that you signed up to be personally liable on.
• 42:52
  SPEAKER_05: And it's like if you think about it, you're like, what in the world did I just do?
• 42:58
  SPEAKER_05: So I talk a lot about that, and it's like, when is the when when does it become a point where it's like, okay, we want to buy the building, and the SBA, you know, gives extended terms.
• 43:11
  SPEAKER_05: I think if the building's involved, you know, you can get into 25-year financing, which is pretty unbelievable.
• 43:17
  SPEAKER_05: So if I go buy a piece of current commercial real estate as a syndication, I I syndicate apartments and other stuff, industrial.
• 43:26
  SPEAKER_05: You know, I'm looking at a 10-year note.
• 43:29
  SPEAKER_05: I can't get 25-year term financing.
• 43:31
  SPEAKER_05: So the financing is pretty unbelievable.
• 43:34
  SPEAKER_05: Um, but you know, that that lease thing, I say, okay, if the landlord's giving you allowances and some other things, maybe go like one or two years personally liable.
• 43:44
  SPEAKER_05: But I say just tell them no.
• 43:46
  SPEAKER_01: You know, if yeah, it's one of the issues you run into again with small businesses over larger ones.
• 43:52
  SPEAKER_01: You know, people don't realize, like we we we think about uh, you know, Citizens United clearly said that businesses all people, and that doesn't mean they To vote, but it does mean legally they're an entity.
• 44:02
  SPEAKER_01: Uh, whether you agree with that or not, that is how the legal structure is set up.
• 44:05
  SPEAKER_01: What that means is that businesses have their own credit score, they have their own, you know, you know, legal entities.
• 44:11
  SPEAKER_01: And what happens is if you have a small business, a small entity that is not financially solvent, at least at a good lendable degree, then what happens is just like a parent, I need to subsidize that business.
• 44:22
  SPEAKER_01: And so if you're the owner, you have to personally guarantee the credit cards on the business.
• 44:25
  SPEAKER_01: If you're you have to personally guarantee the lease that the business has.
• 44:28
  SPEAKER_01: When the business grows to a point where it is financially solvent and doesn't need its parent, i.e.
• 44:33
  SPEAKER_01: the owner, to basically sign off on all the paperwork for it, then the business can self-sustain itself.
• 44:38
  SPEAKER_01: It can sign off on its own leases.
• 44:39
  SPEAKER_01: And so that's another advantage, again, of going as big as you can.
• 44:43
  SPEAKER_01: If you buy a larger company that's doing, you know,$7 million in total revenue and maybe, you know, one, two million dollars of EBITDA, well, then the business most likely does not need the owner to sign a personal guarantee on AIDS.
• 44:54
  SPEAKER_01: The business itself is solid, right?
• 44:56
  SPEAKER_01: Yeah.
• 44:57
  SPEAKER_01: Where, but if you go with that million-dollar company, yeah, I don't I'm gonna need the owner to sign a personal guarantee on the credit cards, on the working capital, on the uh the you know, the working capital loan, on the real estate, everything.
• 45:10
  SPEAKER_01: Because, you know, one hiccup, this thing could be, you know, upside down.
• 45:14
  SPEAKER_01: And that's one of the things that uh a lot of searchers, you know, well, just people in general, they misunderstand between businesses and real estate.
• 45:22
  SPEAKER_01: You know, when things go bad, real estate, there's an asset pay.
• 45:25
  SPEAKER_01: You know, there's there's some sort of physical property.
• 45:27
  SPEAKER_01: And so if everything goes bad, and we see this all the time in real estate, especially we see it right now in commercial um office buildings, right?
• 45:32
  SPEAKER_01: At the worst case, yeah, the value is gonna drop, but at least there's some property, there's a ground, there's a there's a structure there.
• 45:38
  SPEAKER_01: And it's sure it lost like you know 90% of its value, but it's still there, right?
• 45:42
  SPEAKER_01: Um with a business, that does not exist.
• 45:45
  SPEAKER_01: You know, there is no property that can make up any kind of value, even in heavy uh asset companies.
• 45:51
  SPEAKER_01: Like we like to talk about things like heavy machinery or like I've got a lot of trucks for this service business.
• 45:56
  SPEAKER_01: That stuff is minuscuus, minuscule to the actual value of the company.
• 46:00
  SPEAKER_01: And so the value of a business, unlike real estate, is that it takes a lot of different people with their skill sets who all work together to create value that's exponentially bigger than any one of them could do on their own.
• 46:10
  SPEAKER_01: That's a business.
• 46:10
  SPEAKER_01: Yeah.
• 46:11
  SPEAKER_01: And if that business fails, if I was doing a million dollars in EBITDA and now that business is gone, it doesn't matter that I have 40 trucks, because all of those are going to be a salvage value.
• 46:19
  SPEAKER_01: Like those are gone.
• 46:20
  SPEAKER_01: And so there's nothing to underwrite.
• 46:22
  SPEAKER_01: That's why, you know, a lot of times, like, you know, I have people ask me questions about asset-based loans.
• 46:27
  SPEAKER_01: It's a fantasy.
• 46:28
  SPEAKER_01: In most cases that business buyers want to use them, it's a fantasy.
• 46:32
  SPEAKER_01: So it is a completely different world and side tangent, but that's why buying a portfolio of small businesses to run passively is just stupid because they are completely different asset classes.
• 46:42
  SPEAKER_05: Oh, buying like a portfolio of all because Yeah, it is not real estate.
• 46:45
  SPEAKER_01: This is not like single family homes.
• 46:47
  SPEAKER_01: You can just start, you know, racket them up and get GMs to run for you.
• 46:50
  SPEAKER_01: And so now you get all these like milk, you know, you get passive income.
• 46:53
  SPEAKER_01: It is not the same thing, especially when you start firstly guaranteeing debt.
• 46:57
  SPEAKER_05: Let me ask you, you know, I don't pay that much attention to like the you know, the influencers, like the Cody Sanchez's and the other ones out there.
• 47:05
  SPEAKER_05: You know, I think she's probably experienced some real world uh stuff, you know.
• 47:10
  SPEAKER_05: How how do you feel about a lot of those people?
• 47:12
  SPEAKER_05: Do they paint an unreal reality of like, you know, they they make it almost seem like, you know, starting a business is going to be easy, and then, you know, but they're not talking like that as much as they used to.
• 47:23
  SPEAKER_05: I think back in the day they used to make it seem like, you know, this is just, you know, a turnkey thing.
• 47:30
  SPEAKER_05: You just start a business and it's that easy.
• 47:32
  SPEAKER_05: And I don't know, how do you feel about all that stuff, you know?
• 47:35
  SPEAKER_01: I mean, Carson, it's um it's a double-edged sword.
• 47:38
  SPEAKER_01: I mean, when I was a first-time searcher, there was no real there was no infrastructure at all.
• 47:43
  SPEAKER_01: There were no dedicated small business attorneys, there were no dedicated small business Q of E.
• 47:47
  SPEAKER_01: Um, there was nothing, really.
• 47:50
  SPEAKER_01: And and what we've seen over the last six years is just an explosion of infrastructure.
• 47:54
  SPEAKER_01: It is pretty easy for me to find good, credible uh lawyers who can handle my handle my acquisitions or quality variety for batteries, or to hop on a podcast, or look through YouTube and find really good actual advice, not just from other searchers, but from you know independent sponsors and lower middle market private equity investors.
• 48:10
  SPEAKER_01: Like there's so much good information out there.
• 48:12
  SPEAKER_01: But just like every other expansion, there's also that other side where you're gonna have people who are gonna try to grift.
• 48:18
  SPEAKER_01: They're gonna try to say, hey, you know, uh, you can easily buy business using the SBA program.
• 48:23
  SPEAKER_01: By the way, might as well buy 10 of them, put some GMs in charge, and they'll just basically send you cash.
• 48:29
  SPEAKER_01: It's totally fine.
• 48:30
  SPEAKER_01: Um and they really and it's just it's lunacy.
• 48:34
  SPEAKER_01: And um so what I encourage people to do is like really, you know, look you have to learn on your own.
• 48:41
  SPEAKER_01: This is capitalism, but find people who've actually done the exact thing that you want to do, like the real thing, and can prove it, right?
• 48:47
  SPEAKER_01: Yeah.
• 48:48
  SPEAKER_01: So find people who, you know, the one thing that people don't realize is that if someone says they own seven businesses that, you know, provide capital for them, like passively or whatever, I have yet to find a PE firm or or uh an investment banker who is not super proud of all the companies they own.
• 49:02
  SPEAKER_01: And they have them proudly listed on their websites.
• 49:04
  SPEAKER_01: If you can't tell me what you own and I can't actually find it, then odds are it's not real.
• 49:09
  SPEAKER_01: And so, you know, people are you know usually quite proud of their wins.
• 49:13
  SPEAKER_01: And sometimes, you know, they don't disclose what they own from like a PR perspective, but it is pretty clear that they are real, right?
• 49:20
  SPEAKER_05: And so Yeah, I was about to say there's some companies I I just don't want the two tied together, you know, because you don't want to be known as that.
• 49:28
  SPEAKER_05: So, like, say if you owned uh Bob's Pizza and you know, and you you wanted to be known as a real estate guy, but you know, if we hung up, I could tell you what they are.
• 49:38
  SPEAKER_05: You know, I get what you're saying.
• 49:40
  SPEAKER_05: Like, yeah, you know, the PR side, but they could they could uh validate, yeah, he does.
• 49:46
  SPEAKER_01: There are so many credible people to reach out to now.
• 49:49
  SPEAKER_01: Like if I wanted to, if I wanted to talk to somebody who has acquired a healthcare firm and know what it's really like, I can I can look on LinkedIn and find Joe Odell.
• 49:59
  SPEAKER_01: Wonderful person.
• 49:59
  SPEAKER_01: Talk to him.
• 50:00
  SPEAKER_01: Yeah.
• 50:00
  SPEAKER_01: If I want to talk to, you mentioned uh Nathan Lindley, runs an HVAC service, does roll-ups in in Texas.
• 50:05
  SPEAKER_01: Like if I have any questions about HVAC or roll-up, I would talk to Nathan.
• 50:08
  SPEAKER_01: You know, like incredible guy.
• 50:10
  SPEAKER_01: Like, and the list goes on and on and on.
• 50:12
  SPEAKER_01: It is not hard to find people who know what they're doing in this space.
• 50:15
  SPEAKER_01: So just focus in on those people.
• 50:16
  SPEAKER_05: So focus on the good ones.
• 50:19
  SPEAKER_05: I I honestly think the way like social media has evolved, you know, if you get into like like 2017 era, a lot of those Finn Fluencers kind of almost inspired you to say, okay, I can actually start a business.
• 50:33
  SPEAKER_05: But I think a lot of it is they make it seem a little too easy and a little too fake, is what I'm getting at.
• 50:41
  SPEAKER_01: But you know, I I completely agree.
• 50:43
  SPEAKER_01: I think um, you know, like like most things, there's a positive and a negative side to it.
• 50:47
  SPEAKER_01: And it's all the positive really just comes down to the value.
• 50:49
  SPEAKER_01: Um, same reason why it took me so long to like open up in a coaching program, which was because I was negatively influenced by all the bad coaching programs I saw out there.
• 50:58
  SPEAKER_01: I didn't want to be associated with them, but I just kept getting outreach from searchers who had questions.
• 51:03
  SPEAKER_01: And, you know, one thing led to another.
• 51:05
  SPEAKER_01: I'm like, look, I mean, if someone's gonna go and pay a lot of money to take somebody else's course and just get garbage, I would much rather them come to mind and I can tell them, hey, by the way, um, you should probably not buy that company.
• 51:17
  SPEAKER_01: You know, like you know, the money you spent with me to help point you in the right direction is gonna save you the four million dollars of perfectly guaranteed debt you're gonna bankrupt on in about four months because you're making really, really bad decisions.
• 51:27
  SPEAKER_01: And so, you know, some of the best feedback I've ever gotten was someone who DM'd me was like, um, I decided not to, like, they're under LOI.
• 51:34
  SPEAKER_01: They're like, I decided not to move forward after we had our conversation.
• 51:36
  SPEAKER_01: Like, yeah.
• 51:37
  SPEAKER_05: Awesome.
• 51:38
  SPEAKER_05: Hey man, um let me um what are what are you uh are you selling many deals?
• 51:47
  SPEAKER_05: Like uh are you selling any companies lately?
• 51:49
  SPEAKER_05: Like off now?
• 51:51
  SPEAKER_05: No, not at all.
• 51:52
  SPEAKER_01: And so the old there's only two things I'm doing.
• 51:54
  SPEAKER_01: One is I'm sourcing as many GovCon firms as possible, looking for the good ones want into it, raise capital and acquire those companies.
• 52:00
  SPEAKER_01: Yeah.
• 52:01
  SPEAKER_01: Through the independent sponsor money.
• 52:02
  SPEAKER_01: The second one is just in search of school, helping other searchers learn how to do it the right way without falling into the same pitfalls.
• 52:09
  SPEAKER_01: And so I like to help people learn how to source their own deals, and then whatever they find, they can find.
• 52:14
  SPEAKER_01: And I don't know.
• 52:16
  SPEAKER_05: Let me ask you this.
• 52:17
  SPEAKER_05: When people go to market an off-market deal, what does it look like?
• 52:21
  SPEAKER_05: Are they just passing around like, you know, financials or you know, that's the thing I was getting at.
• 52:26
  SPEAKER_05: I the thing I don't like about the real estate industry is you have all these knuckleheads running around with T12s and spreadsheets, and it's like if you're gonna sell it off-market, you know, I I just I think there's a way to do it, but go ahead.
• 52:41
  SPEAKER_05: I mean, what is it?
• 52:43
  SPEAKER_01: I've seen it happen in two different ways, and just for the off-market stuff.
• 52:47
  SPEAKER_01: The vast majority of people that I've run into, uh, just anecdotally, who say they're they have off-market deals really don't.
• 52:53
  SPEAKER_01: They're just finding the obscure on-market ones and just say, hey, I found this off-market deal.
• 52:57
  SPEAKER_01: Um, and put up some sort of stats platform that they try to charge a code.
• 53:01
  SPEAKER_01: Um, the other people who are doing off-market deals actually do a very good job.
• 53:05
  SPEAKER_01: And so you can think of like uh, you know, sourcing agencies.
• 53:08
  SPEAKER_01: Um, and these can be really helpful.
• 53:10
  SPEAKER_01: Um, they tend to cost a lot more money because you're paying for someone to do them yourself, but at the same time, you're buying back your time.
• 53:15
  SPEAKER_01: If I can find an agency that's really good at sourcing off-market deals um and I want to, I'm willing to work with them, then that's great too.
• 53:22
  SPEAKER_01: So both of those can be successful.
• 53:24
  SPEAKER_01: Um, but that's also why you don't see buy-side advisors in the lower middle market, just because it's typically way too expensive to do that for somebody else.
• 53:32
  SPEAKER_05: Yeah.
• 53:34
  SPEAKER_05: Let me I want to pull something up and share it real quick.
• 53:37
  SPEAKER_05: Can you see my screen?
• 53:39
  SPEAKER_05: Yes.
• 53:40
  SPEAKER_05: So, what do you think about like a hybrid approach on off-market where like you take a flyer and you circulate it and you don't allow access without like an NDA and set a deadline?
• 53:52
  SPEAKER_01: So I think it makes a lot of sense.
• 53:54
  SPEAKER_01: I uh this is exactly what I do as an independent sponsor when I come to raise capital.
• 53:58
  SPEAKER_01: The only difference is I'm not trying to sell, I'm not brokering, so I'm not trying to sell the deal.
• 54:01
  SPEAKER_01: But what you're describing is MA advisory or investment banking.
• 54:05
  SPEAKER_01: And so that's what they would do.
• 54:07
  SPEAKER_01: I just use their own network to help generate uh interest and and and buyers and deal flow.
• 54:13
  SPEAKER_01: But uh yeah, it happens all the time.
• 54:16
  SPEAKER_05: So a lot of what I see is, you know, even in the capital raising space, is serious capital responds to serious process, and it's like setting a deadline and then uh doing the NDA.
• 54:31
  SPEAKER_05: Um, the NDA kind of like weeds out the people that aren't serious, you know, the NDA, and it's like when I do them, I don't let brokers alone do it.
• 54:41
  SPEAKER_05: I say you have to have a principal fill out the NDA.
• 54:44
  SPEAKER_05: And it and you know, it's been wildly successful using it.
• 54:49
  SPEAKER_05: You know, I got a little around a$30 million deal, we're getting a um LOI on, hopefully here in the next couple days.
• 54:57
  SPEAKER_05: But you know, good.
• 54:58
  SPEAKER_05: It's one of those where it has to be marketed because if you don't, if you just go out to market off market and you're just taking like T12s or spreadsheets or just a little bit of info, the buyers take their sweet ass time.
• 55:12
  SPEAKER_05: There has to be a deadline so they don't sit there and hesitate.
• 55:16
  SPEAKER_05: It has to be kind of packaged up in a way that it's ready to sell and they have enough information.
• 55:21
  SPEAKER_05: You know, I just I think there's a lack of representation.
• 55:25
  SPEAKER_05: And I've really, you know, on the real estate side, I kind of look at it and I'm like, golly, man, are are you really think you're gonna sell that deal?
• 55:32
  SPEAKER_05: Like they they don't know anything about the freaking market and you're running around with spreadsheets all over town.
• 55:38
  SPEAKER_05: I just think it's you know, it's just a bad way to do it.
• 55:41
  SPEAKER_05: So I was just curious.
• 55:42
  SPEAKER_01: It's absolutely a bad way to do it.
• 55:44
  SPEAKER_01: And uh, you know, the only real moat for um you know advisory or brokerage is reputation.
• 55:51
  SPEAKER_01: And so, you know, if you know, coming from a buyer's perspective, uh, you know, I've got friends in investment banking, I've seen what the seller side looks like.
• 55:58
  SPEAKER_01: But coming from the buyer's perspective, um, if you don't, if you're not reputable and you don't provide me with enough information to make a decision, then I'm just gonna pass.
• 56:06
  SPEAKER_01: Like I agree.
• 56:07
  SPEAKER_01: Like at this point, most buyers are, you know, at least on the sophisticated side, are at a place where they know exactly what they're looking for and they're gonna make a quick pass.
• 56:14
  SPEAKER_01: And if it doesn't fit their box, they're gonna move on, which is good for everyone.
• 56:17
  SPEAKER_01: I agree.
• 56:18
  SPEAKER_01: But you know, at this point, you know, anybody with a broker dealer license can, you know, try to pass around a deal.
• 56:24
  SPEAKER_01: And in a lot of states, they don't even need that.
• 56:26
  SPEAKER_01: They can just do it with a real estate license.
• 56:28
  SPEAKER_01: And so it really does come down to reputation.
• 56:31
  SPEAKER_01: If if I if I know that, you know, Carson and his team um are very good at sourcing, you know, off-market leagues that actually produce something of quality, they're not much more interested in seeing what you have every single time.
• 56:43
  SPEAKER_01: And that just takes time.
• 56:44
  SPEAKER_01: That's why that's why Goldman Sachs doesn't have to worry about raising money.
• 56:47
  SPEAKER_01: They're Goldman Sachs, you know, people just want to sign up and do it.
• 56:51
  SPEAKER_05: How do you feel about the process as far as buying the business?
• 56:54
  SPEAKER_05: I feel like a lot of people are trying to do too much financial due diligence on the front end, and it's kind of like there's a due diligence phase to dig into financials and a QE.
• 57:04
  SPEAKER_05: You know, you put up with all these people, and it's like, golly, man.
• 57:07
  SPEAKER_05: I, you know, a little bit about me, I come from a financial background.
• 57:11
  SPEAKER_05: I'm a finance major, done accounting in corporate America.
• 57:15
  SPEAKER_05: You know, I I typically know more than about 99% of the people I'm talking to, you know, and I'm sitting here going, this person just has no clue what they're talking about most of the time, and they're questioning things they shouldn't, you know.
• 57:28
  SPEAKER_05: But like when I prepare financial statements and stuff like that, I'm gonna, you know, I'm gonna include a lot of footnotes.
• 57:35
  SPEAKER_05: So it's like uh generally accepted accounting practices, so people have explanations for variances and stuff like that.
• 57:43
  SPEAKER_05: But I just I'm I'm kind of like, you know, that that this is something, you know, in this phase, you're getting more high-level information and it's broken down already to where you can, it's enough to make a decision.
• 57:57
  SPEAKER_05: We'll get to the due diligence phase later, but you know, I I just don't feel like it's a time to have like a you know full-scale audit.
• 58:05
  SPEAKER_05: You know, you need a team to do that, and depending on the size of the the acquisition as well.
• 58:11
  SPEAKER_05: So anyway.
• 58:12
  SPEAKER_01: I think that right there, you're what you're hitting on is the sophistication of the buyer.
• 58:16
  SPEAKER_01: And a lot of buyers, they um, well, quite frankly, they're unsophisticated.
• 58:20
  SPEAKER_01: And so what'll happen is they'll try to do all their diligence pre-LOW.
• 58:23
  SPEAKER_01: And I agree, that's not the place to do your diligence.
• 58:25
  SPEAKER_01: What you do is, well, at least what I do, is I take every piece of information I can get from either the seller or the broker, whatever the sales team happens to be, and I take it at face value.
• 58:34
  SPEAKER_01: That doesn't, that's different than saying I trust them, right?
• 58:37
  SPEAKER_01: But I am taking it at face value because what we're doing is we're building a relationship, right?
• 58:42
  SPEAKER_01: I gotta be able to trust you, you gotta be able to trust me.
• 58:44
  SPEAKER_01: And so I'm going to assume that what you're giving me is correct.
• 58:47
  SPEAKER_01: I know that it may not be.
• 58:49
  SPEAKER_01: But I'm going to assume it's correct.
• 58:51
  SPEAKER_01: And based off what you've given me, I'm going to give you some free LOI questions that are going to be material based on our ability to close the deal, whether it makes sense or not.
• 58:58
  SPEAKER_01: And if I'm satisfied with those questions, then I'll put together an LOI.
• 59:01
  SPEAKER_01: But the difference here is that the moment we agree on an LOI, um, I need to know that like if you gave me was what if you gave me uh stuff that was correct and I built my LOI in that fashion, then as the seller, you should expect that I'm gonna close based on that structure.
• 59:15
  SPEAKER_01: I'm not gonna retrade.
• 59:15
  SPEAKER_01: Yeah.
• 59:16
  SPEAKER_01: Because that's what we agreed to.
• 59:17
  SPEAKER_01: If it is materially different, then we have to set have a decision about are we gonna retrade or is this just not gonna work out?
• 59:23
  SPEAKER_01: That's fine too.
• 59:24
  SPEAKER_01: But the area that trips up a lot of buyers.
• 59:26
  SPEAKER_05: Is it an honest mistake or is it something you need to just say, hey, this is enough to get out of here, you know?
• 59:32
  SPEAKER_01: Exactly.
• 59:32
  SPEAKER_01: Or like, did I, you know, because of what I knew ahead of time, you know, was I off on working capital or whatever the case is.
• 59:37
  SPEAKER_01: And you have to kind of decide, you know, what makes sense, you know, the force of the trees.
• 59:41
  SPEAKER_01: And but the thing that trips up a lot of buyers is just they're not very good on the financials.
• 59:45
  SPEAKER_01: And so as a result, um, they're trying to clear everything they possibly can pre-LOI because they know that once they're under LOI, you know, if they have any kind of sense when it comes to risk, they're gonna need to pay for a quality of earnings.
• 59:58
  SPEAKER_01: And yeah, they also they don't want to, they're scared to death of dead deal costs for obvious reasons.
• 1:00:02
  SPEAKER_01: You know, two or three dead deals and I'm out of capital, right?
• 1:00:05
  SPEAKER_01: So what they're doing is they're using their Q of E provider as their financial diligence.
• 1:00:10
  SPEAKER_01: And that is not the correct mode.
• 1:00:12
  SPEAKER_01: What you should be doing is you need to educate yourself to the point to where you can reasonably review financials.
• 1:00:18
  SPEAKER_01: You can, you know, the moment the LOI happens and you get full access to financials, I should be able to use the first week to dive through those financials and find all the big red flags.
• 1:00:27
  SPEAKER_01: And if I can find big red flags that I know are going to kill this deal, I need to kill the deal before I start putting, you know, you know, diligence capital into it.
• 1:00:34
  SPEAKER_01: Even though I that's where I start bringing in the deal partners.
• 1:00:38
  SPEAKER_05: Yeah, I to I talk a lot about that a little bit in my book.
• 1:00:41
  SPEAKER_05: You know, I talk about getting help, but you know, I come from a financial background.
• 1:00:45
  SPEAKER_05: I've owned restaurants, I've owned several different companies, you know, I've I've started mobile apps and just all kinds of stuff.
• 1:00:53
  SPEAKER_05: But, you know, I just know the back ends of these businesses.
• 1:00:56
  SPEAKER_05: And I tell people like, you know, if you're seeing a heavy amount of cash deposits, and depending on what state it is, you know, that owner could be running a gambling operation, you know, and and there's, you know, you just there's just so many things that could be off on the financials to where I think it's the financials don't scare me as as much as I say, okay, how are you making your deposits?
• 1:01:22
  SPEAKER_05: How is this hitting your bank account?
• 1:01:24
  SPEAKER_05: And almost following like the money trail, which is kind of like the real purpose of a financial audit, is like, you know, uh, you know, what's the chain?
• 1:01:33
  SPEAKER_05: How does it go?
• 1:01:34
  SPEAKER_05: So I mean, if you're buying, say, a restaurant, okay, I'm gonna go shadow the owner, you know, and they should let you do that.
• 1:01:40
  SPEAKER_05: Okay, can I can we go to the bank, you know?
• 1:01:43
  SPEAKER_05: So, but you know, getting into that QE and stuff like that, it's like if you see a bunch of little tiny deposits or it's heavy on cash when it shouldn't be, you know, those can be red flags.
• 1:01:53
  SPEAKER_05: You know, uh, I talk about like even in smaller businesses allowing friends to do cash advances off their credit cards and letting you keep 20%.
• 1:02:04
  SPEAKER_05: I've seen that where they're basically running a cash advance out of it.
• 1:02:08
  SPEAKER_05: So I mean it's just I mean it's I see in GoCon factoring is really big.
• 1:02:13
  SPEAKER_05: Yeah.
• 1:02:13
  SPEAKER_05: Oh oh GoCon factoring.
• 1:02:16
  SPEAKER_05: But you know, it's it's like you said, there's risk in every business.
• 1:02:19
  SPEAKER_05: So I mean it's nothing's gonna be foolproof, but you know, doing checks and all that, I think it's really important.
• 1:02:25
  SPEAKER_05: But you know, I don't know.
• 1:02:27
  SPEAKER_05: I people do need to have some sort of financial education before they even go in, you know, or get a lot of help.
• 1:02:33
  SPEAKER_01: So you know I take it to I take it to a step even higher than that, which is um a lot of first-time buyers they simply don't understand the level of expertise requires.
• 1:02:42
  SPEAKER_01: And ultimately, you know, at the end of the day, if you're gonna buy a company, you're the only one signing the currency to it, which means you're the only one liable for every case.
• 1:02:50
  SPEAKER_01: I agree.
• 1:02:51
  SPEAKER_01: Yeah, you are not a lawyer, you are not a CPA, you are not a trained negotiator.
• 1:02:56
  SPEAKER_01: You're a lot of times you've got one good skill and you've never been in this industry before.
• 1:03:00
  SPEAKER_01: There's a lot of things you don't know, and especially it's your first time doing it.
• 1:03:03
  SPEAKER_01: And the problem that you run into is that look, you're never going to be a lawyer, but you need to understand how this process works, like from the ground up.
• 1:03:10
  SPEAKER_01: You need to understand every single thing in your purchase agreement, what is normal, what is not normal, what should be included, what should not be included.
• 1:03:16
  SPEAKER_01: And that goes for every aspect of the deal.
• 1:03:18
  SPEAKER_01: And what I find is that there's usually one or two aspects of the deal that a searcher feels very confident in and they over-index on that.
• 1:03:25
  SPEAKER_01: And there's one or two areas where they're, quite frankly, very weak.
• 1:03:29
  SPEAKER_01: And so they avoid it.
• 1:03:30
  SPEAKER_01: And you know, we don't, as people, we don't like engaging on things we're weak on.
• 1:03:34
  SPEAKER_01: And what you find is that this is, you know, buying a company successfully is project management at the highest level.
• 1:03:39
  SPEAKER_01: And by the way, your neck is on the line.
• 1:03:41
  SPEAKER_01: And so when you actually approach it from that perspective and think, man, I gotta be the smartest guy or gal in the room every single time.
• 1:03:48
  SPEAKER_01: And if I'm not, I need to get a deal team around me who is the smartest and I can learn from.
• 1:03:53
  SPEAKER_01: And I can't just trust them blindly.
• 1:03:55
  SPEAKER_01: I need to know everything.
• 1:03:56
  SPEAKER_01: I need to know what's going on.
• 1:03:58
  SPEAKER_01: When you take that level of ownership, that's a not only helps mitigate your risk in the deal, but it sets you up for success to actually be an owner, which is what you're trying to do.
• 1:04:06
  SPEAKER_05: Yeah.
• 1:04:07
  SPEAKER_05: Oh, I agree.
• 1:04:08
  SPEAKER_05: Man, we I think we just crossed the hour.
• 1:04:10
  SPEAKER_05: This is all great conversation.
• 1:04:12
  SPEAKER_05: I think, no, I I want to invite you to my networking event, but I I want you to uh leave your contact information for people that are looking to get into acquisitions, uh, get into your coaching program, um, you know, so they can have resources, people they can talk to, and you know, maybe partner with too.
• 1:04:32
  SPEAKER_05: Or sometimes if you're, you know, don't want to be the person that's acquiring the business, just invest with Jed or somebody else, right?
• 1:04:42
  SPEAKER_05: I mean, you know, that's there's nothing wrong with that.
• 1:04:44
  SPEAKER_05: Invest with somebody that knows how to run the business and acquire it too.
• 1:04:47
  SPEAKER_01: So um that there's a million ways to do it.
• 1:04:50
  SPEAKER_01: You don't have to be the buyer.
• 1:04:51
  SPEAKER_01: There's I mean, you can especially right now, the sophistication is getting to a point in where, you know, there's a million ways you can get involved, if even if it's right for you.
• 1:04:59
  SPEAKER_01: And sometimes it's just not.
• 1:05:01
  SPEAKER_01: But yeah, uh, it I love the way people reach out.
• 1:05:03
  SPEAKER_01: You can reach out to the best way to do it is directly through LinkedIn.
• 1:05:06
  SPEAKER_01: Just shoot me a DM.
• 1:05:07
  SPEAKER_01: Um, I do my best to reply to everybody directly.
• 1:05:09
  SPEAKER_01: Um, um, beyond that, uh I also you'll find a link on LinkedIn to my search tool community.
• 1:05:15
  SPEAKER_01: It's free to join there.
• 1:05:17
  SPEAKER_01: Um, and the paid coaching program is also through that same platform.
• 1:05:20
  SPEAKER_01: So uh reach out, happy to answer your questions.
• 1:05:22
  SPEAKER_01: Uh, would love to connect with as many people as possible.
• 1:05:24
  SPEAKER_05: Yeah, absolutely, Jed.
• 1:05:26
  SPEAKER_05: I appreciate you, man.
• 1:05:27
  SPEAKER_05: I get so many messages on LinkedIn, I can't really keep up with them.
• 1:05:30
  SPEAKER_01: But told me about it.
• 1:05:32
  SPEAKER_05: Yeah.
• 1:05:32
  SPEAKER_05: Yeah.
• 1:05:32
  SPEAKER_05: I I appreciate you coming on, man.
• 1:05:35
  SPEAKER_05: It's been nothing but a pleasure.
• 1:05:36
  SPEAKER_05: And um, you know, look forward to uh staying in touch with you and watching your journey, man, as you grow.
• 1:05:41
  SPEAKER_05: So anyway, we appreciate you and always life and keep looking forward to meeting you in person someday.
• 1:05:47
  SPEAKER_05: Yeah, absolutely.