Buy the right business with expert David Barnett.

David shares expert insights into buying and selling small businesses, highlighting why acquiring an existing business can be faster, easier, and less risky than starting from scratch.

He also discusses common pitfalls, financing strategies, and how to find the right business to buy while ensuring long-term success.

In this episode of The How of Business, Henry Lopez welcomes back David Barnett, a business consultant, author, and speaker specializing in buying and selling small businesses.

David shares his expert insights on the advantages of buying an existing business versus starting one, the common mistakes buyers make, and how to structure a business acquisition for success.

He also discusses his latest book, Buying vs. Starting a Business, and offers practical advice on evaluating business opportunities.

Topics & Key Takeaways

1. Why Buy Instead of Start?

• Buying an existing business is often faster, easier, and cheaper than starting from scratch.
• Existing businesses come with established customers, revenue, and systems.
• The risk of failure is lower than a startup, but financial discipline is critical to avoid overpaying.

2. The Risks of Buying a Business

• Understanding breakeven points: Can the business sustain itself and provide a salary for the owner?
• The Locus of Goodwill: Does customer loyalty lie with the business or the owner?
• The danger of overleveraging: Taking on too much debt can create financial risk.

3. Finding a Business to Buy

• Broker-listed businesses come at a premium due to competition.
• Proprietary search: The best deals often come from direct outreach to owners before they list their businesses.
• Why the “Silver Tsunami” (Baby Boomers retiring) doesn’t mean easy deals—good businesses still attract multiple buyers.

4. Common Mistakes Buyers Make

• Overcommitting cash flow to debt service—ignoring necessary business expenses.
• Buying a struggling business without the experience or resources to turn it around.
• Taking advice from the wrong people (friends, family, or advisors without small business experience).

5. Structuring a Deal the Right Way

• The importance of seller financing to keep the seller invested in the business’s success.
• Avoiding the “Day Two” problem—having a financial plan for operating the business post-acquisition.
• The role of CapEx (capital expenditures) in long-term profitability.

6. The Freedom of Business Ownership

• Business ownership provides control over time and financial independence.
• While it comes with responsibilities, it can be structured to align with your lifestyle goals.
• The long-term rewards of building a successful business go beyond just financial gain.

David Barnett provides a realistic, experience-based approach to buying and selling small businesses. Whether you’re a first-time buyer or an entrepreneur looking to expand, his insights help demystify the process and avoid common pitfalls. If you’re considering acquiring a business, take the time to educate yourself, develop a solid plan, and ensure you’re financially prepared for the transition.

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Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.

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Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos.

Henry Lopez (00:16):

Welcome to this episode of The How of Business. This is Henry Lopez and my friend and repeat guest, David Barnett, is with me again today. Welcome David Henry. Have I earned the jacket yet? Is this the fifth time? This is the fifth time. So you do get a jacket? Yes.

David Barnett (00:31):

Awesome.

Henry Lopez (00:32):

You’ve gotten to pin before, but now you upgrade to the jacket. Absolutely. You’re very, very, very rare company, but yes you are, sir. So David, obviously I’ve known for a long time, in fact, I was looking it up. This is the fifth appearance. In fact, you first were on episode 99. Mind you, I’m on episode five 50 now back in April of 2017 when you were a young cow man. Holy

David Barnett (00:56):

Yes. It was a while ago. Yep. I probably wouldn’t be recognized by many people though because I think I’ve lost a few pounds since then.

Henry Lopez (01:03):

You look marvelous. But no, you’ve seasoned D well, and now you have even more knowledge about buying and selling businesses amongst other things, but that tends to be one of the specialties. And I happen to be looking potentially this year to buy another business. I’m going to be asking these questions for my selfish interest, but David’s going to share his guidance and thoughts and tips. He’s got a new book as you can see in the background. Now for those of you watching the video buying versus starting a business, we’re going to chat about that. Also, if you want to find any of the resources that I have at the howa business, including the show notes page for this episode, and to find out more about my one-on-one and group coaching programs, just visit the howa business.com. Also invite you to please consider supporting this show on Patreon and subscribe wherever you might be listening so you don’t miss any new episodes.

Henry Lopez (01:56):

Lemme tell you briefly about David Barnett. David Barnett is an entrepreneur, an author, a speaker, and a consultant specializing in helping people buy and sell businesses. David has been working with small and medium-sized businesses for over 20 years. He has helped entrepreneurs buy, grow and sell businesses, and as I mentioned, David is the author of eight books about small business transactions and local investing, including buying versus starting a small business and related 21 stupid things people do when trying to buy a business. I’m going to try to avoid some of those things. He’s a host of a very popular YouTube channel, a lot of free information there with hundreds of videos on buying, selling, financing, and managing small and medium sized businesses. You can find out more at his blog site, David C as in Charlie, David C. Barnett with two T’s at the end, David c barnett.com once again, and David lives in Canada for that, for who those who are tracking where people live. And so once again, David Barnett, welcome back to the show.

David Barnett (03:05):

Hey, I’m glad to be here. Thanks so much for having me, Henry.

Henry Lopez (03:07):

Absolutely, absolutely. So let’s get right into it. If anybody wants to learn more about David, go back to episode of 99 and we do a deeper dive into his background and entrepreneurial journey, which is fascinating in and of itself. But I’ll start with this question related to your book. Why should I consider as a prospective business owner, maybe it’s my first business, maybe it’s my second business to buy an existing business versus build. I know that’s a big question, but at a high level, get us started. Why should we think that way?

David Barnett (03:38):

So here’s the bold statement. It’s faster, easier, and cheaper to buy an existing business than it is to start one. And it simply comes down to the fact that when you start a business, you have this unknown in front of you, which is how long is it going to take me to achieve a break even point? And in a lot of my literature, I talk about several different qualities of breakeven points. I don’t know if you’ve ever gotten into this, but a lot of people will start a business and of course in its infancy, the business is new, it doesn’t have a lot of cashflow, A lot of people are going to start off, they’re not going to take a paycheck, for example. And so the first even is when the business is actually covering its own bills. Then the second break even is when suddenly it’s now can afford to pay its owner.

David Barnett (04:22):

Then I often argue a third break even is when it can actually afford to pay its owner a market wage because often people will take some amount of money out that they can maybe live on, but it’s really not paying them as much as they would earn if they were doing the kind of work maybe they’re doing for some other more established company as an employee. So there’s sort of these three steps and we can plot and project when we think that will happen, but we’re never sure. There’s no degree of certainty when you buy an existing profitable business, you’ve already got cashflow and you’ve got the product, the service, the systems. You’ve got employees who understand what they’re doing day to day in their work and you’ve got that customer base.

David Barnett (05:07):

So the market risks, the sales risks are greatly diminished when you buy a business. That doesn’t mean it’s risk free. There’s another whole plethora of other different kinds of risks that many people don’t even think about. And this is a big part of the conversations that I have on my YouTube channel and some of the stuff that I talk about when I’m a guest on a show like yours and the things that people don’t think about are where do the loyalty of those customers reside? Does it reside with the individual who happens to be the owner of the business today or is it in fact with the brand? I actually call this the locus of goodwill, determining where the goodwill resides. And for some businesses the locus of goodwill is in its physical location. So if the business happens to be in an ideal spot or you are sort of the truck stop at the interstate interchange or whatever, the fact that the business is in that spot, it could go out of business and somebody else could open it up. And there are going to be customers who won’t even notice

David Barnett (06:10):

They’ve always stopped at that place. And so where is the goodwill? That’s important. The other risk that people often fail to understand is that if you overpay for a business, you are simply trading the market risk of not having enough customers for another different kind of risk, which is finance risk. So if you allocate your cashflow to debt service by having paid too much for the business, then you’re in the same position. Whereas for example, if you lose five or 10% of the customers suddenly now you can’t pay yourself for a different reason, not because you haven’t reached breakeven, but because the money you are earning is all going to the bank.

David Barnett (06:58):

And people don’t think about that. A lot of people who get into the realm of business acquisition, they start to learn from different people online. They read materials, they take courses, all this kind of thing, and they become very, very, very focused on the deal and how can I get the deal to happen, how can I become the owner? And then very few people are actually really thinking about what’s truly important, which is what I call the day two problem, which is after you’ve done the deal on day number two, operating a successful business and creating the cashflow to service all the debts that you’ve incurred and taken on to do the deal. Over the course of my career, I’ve met many different people who will challenge me on certain things and they’ll say, oh, you can do this, you can do that. People will actually hold up examples of deals. I’ve had brokers give examples of deals, how people have structured creative financings. And what the person ends up doing is they put themselves into a position often where everything just has to be perfect in the new business in order for things to be successful because of the amount of leverage and maybe the amortizations they’ve agreed to, et cetera. And as you and I know as experienced business people, it is very rare that a business is executed on an ongoing basis in a perfect way.

David Barnett (08:22):

There’s always ups and downs and bumps in the road. And this is something that you really have to take into account when you’re making your deal and you either have to address it through one of the levers that we have when we make a deal, which is either the price, the terms, or some other mechanism for making sure that if things aren’t exactly perfect that you’re not going to end up in an unfortunate position where you end up working for free. I mean, listen, I’ve met a lot of people who’ve bought businesses that end up at certain points working for free, and that’s not why you buy the business.

Henry Lopez (08:56):

Right. Alright, so a lot that you’ve shared there that we’re going to unpack a lot of, but this last point I think is interesting that I’m sure you hear it all the time, but often people say, oh, can you do it that way? It’s like there are no rules on how you can structure a deal as long as it’s legal and there’s a lot of leeway there. But what I’m hearing from you and you’ve seen is that’s a good thing, but it can also be what gets us in trouble sometimes, right?

David Barnett (09:23):

Yeah. Sometimes there are guardrails in the deal. So the best example of what I would call a guardrail is if you are using a bank, because the bank has their own set of interests deal course, and the bank is going to create certain S rules

Henry Lopez (09:38):

And they’re going to have some rules that they’re going to have to apply

David Barnett (09:41):

That your deal’s going to have to fit into. But a lot of small business deals are done without a business acquisition loan. Not to say that there isn’t any bank financing at all, but they’re not done with very commonly like an SBA loan. And when you don’t have a business acquisition loan, then those guardrails disappear and people can get as creative as they want. And to your point, you may find a way to do the deal and pat yourself on the back, but only to learn later that you may not be in the best position.

Henry Lopez (10:16):

Having said that, that is to me and to you, one of the many advantages of considering buying a business if you structure it that way because of the flexibility. I think just at a high level, again, if we eliminate traditional an SBA loan, let’s say when I build something, I have to spend the money upfront depending on what type of business. Let’s say it’s a traditional brick and mortar business, I got to spend that money upfront, build it, and then they will hopefully come, as you alluded to, when I buy a business, there’s an opportunity to defer and delay and arrange it such that I don’t have to necessarily come up with all that money upfront. And I think that’s a huge advantage that I’ve been able to leverage when I’ve bought a business before.

David Barnett (11:01):

Well, but I would challenge your thought framework there for a little bit because when you buy a business on the day, you become its owner, you have bought it and you pay for it on that day. It’s just a matter of where you got the resources to do,

Henry Lopez (11:17):

For example, better than I may have structured a seller’s note. I may have structured a holdback or some, a chunk of money that gets paid later based on some certain metric. All of those things allow me to not have to spend that capital upfront in certain situations, right?

David Barnett (11:37):

Yes. You’re still on the hook for it. Of course, of course. Yeah. So here’s a mental exercise I sometimes challenge people to do. Henry, you’re a business owner today. So if we looked at the cashflow of your business and we determined an appropriate valuation multiplier and we said, Henry, here’s what we think your business is worth today. Imagine yourself going and taking a loan for 90% of that amount and then taking that money out of your business and now you’re going to carry on running your business, but now you have to make the debt payment on that loan. And how does that make you feel? How does that change the way you might make decisions day to day? One of the interesting things that I’ve gathered from other entrepreneurs that I’ve dealt with over the course of time is a lot of people who will get into a business either through startup or acquisition and do what you’ve just described, take the big bank loan and all that kind of thing, when they get to the end of that amortization, when they’ve paid off those loans and then they operate in that sort of free cashflow period where much more of the money is going down into their pocket, many of them will be faced with opportunities where they could do another acquisition perhaps, or maybe they need to borrow a lot of money to reinvest in capital assets and things.

David Barnett (12:58):

And a lot of them really

Speaker 4 (12:59):

Hesitate

David Barnett (13:01):

Because they understand what it’s been like to live through the period of high leverage with high debt obligations and the personal guarantees and all of the stress and anxiety that comes with that scenario. And going into it. When we do an acquisition, we look a lot at what the positives are. And after you live through it, many entrepreneurs have scars and stories. I can tell you about the cashflow crisis three years in where all of a sudden they couldn’t take a paycheck or they had to borrow against credit cards or they had to do these maneuvers to try to survive. And many of them do survive, but once they’ve been through it the first time, they often don’t want to do it again.

Henry Lopez (13:46):

Alright. But there it seems to me, if I was a person who hadn’t owned a business yet, you would be fueling that fear that a lot of people have of looking at debt as always a bad thing. That mindset that we bring from personal finance, which is correct, that typically debt is a bad thing, but speak to me because I know that’s not your point of view. How do you help people make that mind shift to understand that the right amount of leverage, the right ratios of debt are essential and we do want to continue to leverage debt as much as possible rather than putting our cash in?

David Barnett (14:26):

Well, I guess there’s two ways that we want to look at this and there’s the level of leverage, that’s number one. And then number two is where do you get the money? And what people that are new to the space often haven’t stopped to consider is that different debts from different sources have different qualities to them.

Speaker 1 (14:45):

Sure.

David Barnett (14:46):

And it’s much easier, for example, to owe money to a person or to owe money back to an array of investors you’ve collected to do a deal than it is maybe to owe money to a bank, which is very unforgiving and very by the rules, et cetera, et cetera. And so there’s a lot more layers to the onion than simply how much I want to borrow. And what I teach for example, is that in any deal that you’re buying a business, you want to have a material amount of seller financing involved because the seller financing is the mechanism that we use to hold the seller accountable for all the things that we’ve been told during the purchase process.

Henry Lopez (15:30):

And let me interrupt here, are you still seeing that that is prevalent in or certainly an opportunity in a lot of, if not a majority of the smaller deals out there? In other words, this is still a very common method of financing. Is the seller financing, is that what you’re seeing?

David Barnett (15:52):

It’s what I’m seeing. And if you talk to attorneys who are doing these small business transactions and working on the paperwork and ask them what percentage of the deals they work on are involving, for example, an SBA loan, they’ll give you their own stats. But here’s the problem with the internet, Henry, is that the internet is filled with content and the social media platforms create algorithms that feed you more of what it thinks you want. And so there are people, for example, whose business it is to originate SBA loans and bankers and all this kind of thing. And those people are looking for customers. And so they’re out on podcasts, they’re talking to people, they’re creating content. And so if you get into this space and you start listening to different podcasts and things, you’re going to hear these stories over and over and it’s very easy to start to believe that this is what everybody’s doing because there’s nobody out there trying to sell, for example, the different kinds of deal structures you can do. There’s nobody out there trying to market seller finance

Henry Lopez (16:51):

Well because there’s, there’s no money to be made there brokering a seller financing note.

David Barnett (16:57):

Well, exactly right. And so what happens to a lot of people is they will make an offer on a business, maybe they will go and talk with a lender. And here’s the other thing that happens is that let’s say you make an offer on a business and you say, I’m going to give you Mr. Seller 60% of the business value price on closing day, and I want you to carry a note for 40%. And you negotiate that and you think this 40% seller note is going to be great for helping to manage your risk. And then you go to the banker and the banker’s job is to create cash flowing assets for the bank. And so the banker looks at the deal, they look at your credit history, et cetera, and they say, why do you want to borrow so little? We’ll lend you 90% of this purchase price and it actually undermines the position of the buyer if you agree to that, right? So I sort of have this love hate relationship with the SBA because in the United States, SBA financing allows a lot higher leverage in business acquisitions than anybody else in the world can get.

David Barnett (18:07):

But the sellers know it’s available. And so a lot of sellers will then say, I don’t want to carry a big seller note because I know you can borrow the money assuming that the deal’s at the right price and all that kind of stuff. There really are a lot of variables that have to come into place. You have to be the right buyer. The seller has to believe in you and trust that you’re going to be qualified to operate the business so that they will be willing to make you a loan to buy their business, and they have to be properly motivated.

Speaker 4 (18:38):

Absolutely.

David Barnett (18:39):

If they’re not properly motivated, then they’re not going to agree to a deal unless they get everything that they want.

Henry Lopez (18:45):

That’s right. That’s right. Alright, let me take a turn here. One of the things that I’ve always been challenged with, so in my business ownership career, my very first business in 1991 was an existing business that I bought, then bought another one, sold those. Those were the pizza franchise that I was in. Then I bought another salon, suite two salon Suite locations, bought those, sold our car wash businesses that my partner David Begin and I were in, sold the yogurt shops. So I’ve bought and sold our business. I’m just thinking how qualified you are to host a show called the How of Business. I know, and still I do have imposter syndrome like all of us. So here’s my question. I have found it challenging again this turn when I’m looking for a business again, where to find a business to buy. Give me your insights on how I find a business to buy.

David Barnett (19:42):

Have you heard this rumor going around the internet that there’s something called the silver tsunami. All these baby boomers are retiring and fires.

Henry Lopez (19:49):

They’ve been listening to this for years now for years. All kinds of things that the baby boomers are going to do, including they don’t want, their kids don’t want their businesses, their businesses for sale. These are great businesses and they can’t get ’em sold.

David Barnett (20:02):

Yeah. So it’s largely a marketing line because I can tell you that way back when I first got into business brokerage in 2008, every time I put a good profitable cash flowing business up, especially one that was a business only open Monday to Friday during business hours, within 48 hours, I’d get over a dozen inquiries. There has never been a lack of buyers for good businesses. The ones that aren’t good, nobody should buy. The fate of the vast majority of small business has always been wind up in closure. A person wants to retire, they shut things down, they wind it up.

David Barnett (20:42):

So there is a constant demand for really great businesses at the right price that make good money. And so the question then is how do you position yourself to solve what I call the visibility problem? So what is that precisely? It’s easy for Henry to see businesses. I mean, businesses want to be seen and they advertise to make sure people know that they’re there. So Henry, if you decided that you wanted to buy a machine shop in a given state, a machine shop in Georgia, you could very easily create a list of such businesses by Googling or finding phone book data or whatever. You’re going to be able to find that list very easily. But those machine shop owners can’t look out their window at people walking or driving by and know which ones are interested in buying a machine shop. And so this is why the business brokerage industry exists.

David Barnett (21:35):

So what the business brokers say to that machine shop owner as their value proposition is they say, Hey, let me take your business on, I will create a package. I will market it online. I’ll use these websites that advertise businesses for sale, and I will bring these buyers in. I’ll solve this problem, and with any luck, I’ll be able to present your business in a positive light and attract many of those buyers and we can create a competition between the buyers, which can get you a higher price that will justify my commission. That’s sort of the business broker value proposition.

Speaker 4 (22:09):

Sure.

David Barnett (22:09):

So what that means is if you as a buyer are going to rely upon what you find on these websites or what you find listed with a business broker, you are in a race with other buyers and you’re going to be competing with them. And this means that yes, you’re going to readily see business owners that want to sell. They’re motivated, they’ve listed their business for sale. There’s some degree of preparation that’s gone into the presentation, information should have been gathered. There’s a lot of reasons why finding a business with a business broker is going to make things easier for you. The one thing that’s probably not going to be essentially really great for your point of view may be the price, because all those buyers are going to be competing. So if you’re not going to go down that route, then how are you going to find the business is through a methodology called proprietary search. So the very first step in proprietary search is figuring out what you want. So I gave the example of machine shops in Georgia. So once you know that’s what you want, then you basically have to create some kind of networking campaign to meet the owners of those businesses and let them know that you’re interested in buying their business. So you have to solve the visibility

Henry Lopez (23:21):

Problem. And often it’s a matter of connecting those people even before, well before they’ve decided they’re putting their business up for

David Barnett (23:30):

Sale. Right? Almost everyone you ask, I’m interested in buying your business, would you like to sell it? Almost everyone is going to say, no, I’m not done with it. They’re in the midst of running it, they’re enjoying the cashflow and they’re, they’re happy. But there’s five reasons why small privately controlled businesses tend to go up for sale. And the biggest one is burnout, boredom and fatigue so that the person becomes mentally disengaged, they’re tired of it, they’re not interested anymore. If this person had a job they were bored of, they’d go look for a new job, but they own the business so that they need to try to secure some degree of value out of the business before they move on to the next thing, whatever it might be. Then there’s the common ones, divorce, poor health, the need to relocate, and then we have retirement. And the commonly held belief is that retirement somehow is linked to the age of 65. This comes to us from the world of employment. Right? Exactly. In the world of entrepreneurship, as long as people are healthy, happy, and feel that they’re enjoying their work, why would they sell their business? Absolutely.

David Barnett (24:43):

Absolutely.

Henry Lopez (24:44):

I mean, I aspire to be a business owner of some sort well into, as long as I have the mental capacity until somebody takes the keys away, I’m going to be doing it.

David Barnett (24:53):

Well, I find that entrepreneurs exit at two different points. So people who have these incredible out of the park, grand slam events, you start the business and it turns into a hundred million dollars thing. Those people tend to get out in their

Speaker 4 (25:14):

Fifties

David Barnett (25:16):

And then they use that money to enter into some other kind of stage where they become like an angel investor or something like this, or some passion project or something that

David Barnett (27:12):

The other people who are the vast majority of business owners who are earning a good salary, a good profitability out of their business, maybe a hundred fifty, two hundred, three hundred grand a year or whatever, that’s not really the kind of business you can sell when you’re 50 years old and live off of it for the rest of your life. And so those people I find tend to be in there at least into the end of their sixties, often into their early seventies until they reach a breaking point where they’re just, they realize that the time in front of ’em is worth more than the money,

Henry Lopez (27:48):

Especially if you have, again, a smaller proportion have gotten your business to where you’re not working in your business 70 hours a week, right? If you’ve managed to build a mature business where you’re not there daily, then that’s more likely you’re going to hang onto that business. I want to go back to,

David Barnett (28:05):

And if you’re really good at that, you can even keep it a few more years.

Henry Lopez (28:08):

Exactly. Exactly. Or part of a portfolio of businesses. Alright, I want to go back to the thing that I think about though is, okay, so that business owner who’s already listed, I realize that I’m paying a premium now because I am buying into a competitive space now where others want it as well and I’m covering the broker’s commission. So all of those things are happening there, but conversely, aren’t I, when I’m approaching someone who hasn’t put it for sale yet, isn’t there the mentality there, well, at the right price, meaning the seller’s thinking, in other words, so aren’t I going to pay a premium there to entice that seller, that potential owner to sell? It

David Barnett (28:47):

Depends how disciplined you are as a buyer. So to know what is a good deal for yourself and to look at a business and say, this is what it’s worth to me, there is sort of a syndrome that you can initiate when you approach a business owner and say, I’m looking to buy a business like yours where they think, Hey, I’ve hit the jackpot now I have got this golden goose that Henry wants to buy. So you have to know what it’s worth to you and you have to stick to your guns. And this is where if you’re in a position of compulsion, it’s very difficult to do this.

David Barnett (29:22):

A buyer’s only leverage in a negotiation to buy a business is the willingness to walk away. Walk away. Yeah. So is your leverage. That’s right. And this is where there is a group of people out there, there’s a whole sort of a rabbit hole of online content about something called a search fund. And search funds tend to be about people who take on investors to finance a full-time acquisition journey. That’s typically about two years. When these people get to the end of that two year limit and they haven’t found deal, they’re under extreme pressure to get any kind of deal. And that’s not the kind of position you want to be in, that’s when you make mistakes,

Henry Lopez (30:00):

Right? Yeah,

David Barnett (30:00):

Exactly. And so the solution to that discipline, the way that you maintain the discipline is through deal flow. So when you’re talking with the business owner and they say, oh, you want my business? Well, I’m willing to sell it for this. And you say, well, you know what? If I’m going to buy a business, I have to pay a price that is going to allow me to draw the necessary salary from my time working in the business. I’m going to have to service debt, I’m going to have to get a return on the capital that I’ve put in as my down payment. I have to make sure that there’s enough cashflow for a capital expenditures to replace equipment, et cetera. And so I’m totally willing to get into a deal to pay a reasonable price, but if the price doesn’t work for me, I’m not going to do it. If you’re serious about moving on and you’re motivated and you want to talk about this, we can do that. But I’m not here to have your business at any cost. And the way that you’re going to have the confidence to say that is by having multiple conversations going at the same time with other business owners and

Henry Lopez (31:02):

The discipline not to fall in love or at least not to make it obvious that you’ve fallen in love with having to have that business.

David Barnett (31:09):

Yeah, exactly. And so I run a coaching program for people that are going through this process, and a lot of the people in that program, they will have these conversations, they’ll have these communications with people, 95% of the people they reach out to say they’re not interested, and then magically over a 12, 18 month timeframe, some of these people that said, no, I’m not interested, all of a sudden start to show back up in their, of

Henry Lopez (31:35):

Course they do

David Barnett (31:36):

Because something has changed.

Henry Lopez (31:37):

You planted that seed, they remember you and something has happened and now they say, let me give that Henry a call back and discuss. But what you’re pointing out is it’s a numbers game. To put it crudely, you got to make a hundred contacts and maybe 10 of them you make offers on and maybe one of them is a potential opportunity kind of thing. Right.

David Barnett (31:56):

Well, do you want to know the sort of dirty word that we can use to describe this process? It’s sales. Yeah, exactly. And I say it’s a dirty word because a lot of people don’t like the idea of sales, but what you are doing is you are selling an opportunity to exit. And so just like if you were the sales rep for the fancy new machine that people might be able to use in a warehouse, if you were going to sell that machine, the new forklift or whatever, you would have to make a list of warehouses. You’d have to go knock on doors, you’d have to find out who makes the decision. You’d have to talk with them about why your forklift is better. And you can just imagine this whole process to get to sell some of your machines, right? Yeah, it’s exactly the same here with a proprietary business search.

Henry Lopez (32:45):

Alright, one of your books, 21 Stupid Things People Do When Trying to Buy a Business. As you think back now, I know you’re so good at tracking the data and all of the analytics of it, but what’s one or two of those stupid things you saw commonly in 2024 or hear recently?

David Barnett (33:02):

Yeah, some of the common things that stupid things people are doing is they are bringing advisors in who should not be advising people about business acquisition,

Henry Lopez (33:17):

Who

David Barnett (33:18):

Like their neighbor, the guy from the church. They’ll just look for opinion and counsel from people that they have a high opinion of that they believe are wise, intelligent people. Instead of getting people who, for example, have owned a business for 10 years or something like that, people who have real business backgrounds. One of the things that I like to say is that business acquisition and business operation is a thing that should be done by business people and business people have business friends, wouldn’t you agree? Yep. So if you’re going to get into this, I believe that people need to go through a period of almost like, what do you call it when the caterpillar turns into a butterfly? Meta, meta metamor, metamorphosis,

David Barnett (34:14):

Meta. You have to become a business person and part of that journey is to gain experience in decision-making, putting yourself into uncomfortable situations. When young people ask me, what should I do if I want to buy a business? One of my first responses is, look for a job in sales, learn to be rejected, learn to think about problems from the customer’s point of view. Learn how you create a value proposition that’s going to be enticing to the customer because all of those things are going to be directly applicable to every level of business management and ownership. And part of that journey is creating friendships with other people and whether it’s through something kind of formal like some kind of mastermind group or something like that, or if it’s informal, just the guys you play golf with who are all business owners, you want to create that network of people who have been there and done that and understand what you’re getting into. That is one of the biggest things I’ve had to have many conversations with people who were following advice that they got from people who really were not business people.

Henry Lopez (35:23):

Yeah, no, it happens. I mean it happens ongoing as well. I was smiling at that because, and you do as well as I talk to prospective people who are considering hiring me as their coach, it is interesting how people rely on their friends or family and they’re all well intended, but they don’t know how to guide you if they haven’t done it before. Alright, so getting advice from the

David Barnett (35:47):

Wrong people. And the second big thing is overcommitting cashflow to debt service. Okay. Alright. And so the way people do this is they don’t understand everything they’re going to have to pay out of the number they’re presented.

Speaker 4 (36:01):

So

David Barnett (36:02):

In the world of small business acquisition, we use a figure called Seller’s Discretionary earnings,

David Barnett (36:07):

And it is not profit. People have this idea that the seller’s discretionary earnings is the money I get. It’s not because out of that STE number, you have to pay yourself a salary service. Any debt you’ve taken on, you’ve got to pay income taxes on profitable business is going to have a tax bill. You also have to get some kind of return on the cash you brought into the deal and you have to have what’s called a CapEx budget because the way we get to seller’s discretionary earnings is by adding back depreciation and amortization. That’s how we represent the big durable assets wearing out over

Speaker 4 (36:44):

Time,

David Barnett (36:46):

People will get into a deal, actually had a conversation with someone who wanted to go after a business that had a lot of big trucks and equipment and they thought it was a great deal. They were looking at it from a multiple of EBITDA point of view, and I said to them, this business has 30 vehicles. What’s the average lifespan of a vehicle? Seven years. So that means every year this business is buying four vehicles and those purchases come out of the ebitda. And just like that, Henry, the cashflow evaporated by half and this person was completely unaware of that part of it. And this is how people trap themselves.

Henry Lopez (37:31):

And again, that’s a matter of, that’s a person that obviously, understandably, I would’ve made the same mistake, has never owned a business, hasn’t thought through those things, hasn’t had to write those checks. Right. Okay. So that’s important considering those components of it. We mentioned at the outset you alluded to it, but I think the biggest mistake I see, I’m sure it’s on your list, I know because I’ve read the book, is buying a business that’s obviously, it’s not even pretend profitable, it’s losing money, but I’m confident I can turn it around.

David Barnett (38:02):

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

Henry Lopez (38:26):

Question.

David Barnett (38:28):

25%, I forget the exact number. It’s under 20, it’s either 13 or 17. It’s somewhere there and they’re like, we successfully turn around one in six businesses. What it is,

Henry Lopez (38:40):

We successfully

David Barnett (38:41):

Spend your money to try to turn around one in six businesses. And so who should be buying a turnaround opportunity? I’ll tell you exactly who is the person who owns and operates six profitable frozen yogurt places.

Henry Lopez (39:01):

That’s right.

David Barnett (39:02):

Could go buy money losing frozen

Henry Lopez (39:05):

Yogurt places and absorb that. Now I have experience, I maybe I’ve done it before, I know the risk that I’m taking. I believe it’s going to be accretive to my overall mix, all of those reasons. That makes sense. But as a first time business owner,

David Barnett (39:22):

But most importantly, a person who already owns six profitable frozen yogurt shops, if they fail to turn around the seventh, they still have six that are making money for ’em, right? Correct. They’re not, it’s not going to sink their

Henry Lopez (39:33):

Ship.

David Barnett (39:34):

Exactly.

Henry Lopez (39:34):

Right, right. Alright, excellent. We’ve chatted about your books, but tell us more about what you do these days and who’s an ideal client, but also consumer of all of your content. Tell us about

David Barnett (39:49):

That. Yeah, sure. So anyone who’s interested in this whole idea of making business deals, or if you own a business and you’re just looking for ways to improve your business, ideas about management or growth through acquisition, tune into my YouTube channel, which the audio is put onto a podcast feed too, if you prefer that you just look for David Barnett’s small business anywhere and people who are really interested in going down this path. I do have some online education programs. Nobody anywhere should be spending $10,000 with an online course on how to buy a small business. I’ve got a program that’s over 40 hours long. It’s a few hundred dollars. You can learn what you need to know. And most importantly, what I’ve gotten from many people who’ve gone through the course that I offer is that they go through it and they say, wow, I really realized just how unprepared I would be if I actually got into this. And that journey of self-discovery of learning what is really your calling or what you would be good at, I think is really important. I challenge people often Henry, to ask themselves where the idea of buying a business came from.

David Barnett (41:07):

I’ve been online creating content for over 10 years, and for the first half of that period, the only people I ever met were people that knew they wanted to be in business. Maybe they explored doing a startup, they may then have evolved and said, you know what? It’s risky to do a startup. I’ve got a mortgage, I’ve got children. Maybe I’ll buy a business. And then they would find me online. They were typing questions into the different platforms about business acquisition. But in the half the last few years, I’m meeting all these people who are saying, I don’t want to miss out on the baby boom. Retirement. I’ve heard there’s a

Henry Lopez (41:42):

Trillion dollars. They get rich quick opportunity that they don’t want. It’s a Bitcoin opportunity. It’s the fomo.

David Barnett (41:51):

And if you have been attracted to these conversations because you see something flashy on social media and you think there’s quick money to be made and you’re going to miss out, I would strongly caution you that you’re probably going to get yourself into something that you don’t understand. And this idea as well floating around that you can just put a manager in place and you would have to be someone really without a lot of imagination and thought to fall for that one.

Henry Lopez (42:25):

But people do though. I mean, I see this three routes you can take. People either are have enough of the money or can get it because their credit score is good and they get themselves into trouble. Or there’s the other group of people that when they get to this level and they realize, oh boy, this is a lot more complex. This is going to require some work, they bail out. And then I think that leaves the people who will do it the right way and take the time to learn, educate themselves, including with your resources, to then have a higher probability for success because none of this is guaranteed. That’s the thing with business, there’s that often people come into it, this group is in particular is thinking it’s foolproof. Well, it’s not right. It’s really hard.

David Barnett (43:09):

Yes, there’s no such thing as an automatic business. And even the people I’ve worked with who’ve bought a business, I’ll tell you a path that I’ve seen be successful. Someone buys a business from an owner operator, the buyer goes in, learns the owner operator’s job and role, and then they go and employ some better systematization and tools, workflow tools. They create that handbook for running the business. They do a lot of the things that you talk about on your channel, and then they’re able to hire someone to take over some of those day-to-day management roles and they can kind of step back into this owner role. But here’s the thing is that there’s nothing automatic or passive about the owner role because there are certain things that are never going to be delegated to a manager. Banking relationships, decisions about big debts, decisions about large capital, investments in equipment, buildings, et cetera, renovations, none of these things are ever going to be delegated.

David Barnett (44:07):

The fact is, is that as a business acquirer, you’re going to have probably a good chunk of your net worth in the form of a down payment put into the deal, and then you’re going to sign a personal guarantee on a bank loan for a much larger sum of money that could represent a total liability greater than your net worth. It’s such a huge thing, and people realize this a serious thing. And so you have to develop what I call the regional manager skillset. You have to know the business well enough to know what to keep your eye on so that you can observe what the manager is doing that you put in place. I always draw the analysis or the analogy rather to Exxon gas stations, each one’s got a manager, but that person doesn’t run the business for a year and send financial statements to head office. There’s a regional person who’s kind of looking at key numbers from each location. They’re looking at a real

Henry Lopez (45:01):

Time for that matter.

David Barnett (45:03):

If they see a problem with a given location, they’re going to go in and make inquiries and find out what’s going on and try to get it back on track. And that’s the skillset that an owner has to develop to successfully own a business without being there every day. And because of the problem of bench depth in small business, meaning you don’t have such a deep team, if anything happens to your manager, nine times out of 10, the backup is you, which means you could in a moment’s notice, be called in to have to go in and try to manage something. And again, we go back to people, listen, Henry, people have accidents. People get sick, people fall in love and move across the country. All kinds of things can happen to people, to all of a sudden make them not available to be your manager anymore. And that’s the thing that you have to plan for if you’re going to try to pull that off.

Henry Lopez (45:57):

Right. I could have listened to this episode and thought Henry and David have just convinced me to never come with a hundred yards of starting a business. What do you say to somebody who feels that way? Why should somebody buy a business or start a business? It doesn’t matter. Go into business ownership.

David Barnett (46:17):

So if you have an interest in business and you have a passion for freedom and responsibility and control, and you want to hold the reins of your own destiny and you are ready to step up and be responsible for the outcomes of the decisions you make, and you want to shoulder those burdens, I don’t think there’s another course. You can take another path. And the opportunities are huge. There’s an opportunity there for greater control over your time, deciding what you want to do, where you want to go. There’s an opportunity to decide how you want to build the business and what you want to push and how far you want to go. I meet a lot of business owners who are on a constant quest to grow bigger, stronger, more profitable. That’s the path that they’ve chosen. I meet a bunch of other business owners who buy a business, pay down their initial debt, they have a good cashflow and they think, wow, this is exactly what I need to afford to go surfing every Friday or whatever it is that they want to do.

David Barnett (47:17):

And it plugs into their lifestyle. A business is an asset that provides for you and your family. What’s so fantastic about it is that the way it provides for you and your family is by providing for the wants, needs, or helping solve the problems of your customers. And you voluntarily offer those solutions to your customers. They voluntarily choose to give you money to get those solutions or comforts. So there’s a virtuous relationship between a business and its customer, and by operating it properly and making sure that you are a good steward of that system, that process, you by extension get to enjoy a good life. And I think this is why business is the foundation of free and prosperous societies. Everything about it is good. I mean, if the customers didn’t like it, they wouldn’t come. If you didn’t like the customers, you wouldn’t make the offers. If you can’t run the business, you’ll be out of business and the resources that your business uses will fall into the hands of other people who will run them better. It is a thing that always encourages better, higher quality, et cetera. So if you want to be a part of the success story of the world, business is certainly a way to do it as far as I’m concerned.

Henry Lopez (48:39):

Yeah, well said. Well said. There’s not much I can add to that. I agree completely, and I think that the only thing I would accentuate is the point you make that I think that a lot of people, I’m not saying I’m guilty of it as well, sometimes come into business thinking, I’m going to hit that huge home run, right? I’m going to be the next millionaire, multimillionaire, billionaire. And that’s great. That’s great. The reality is that for most of us as small business owners, it’s not that I didn’t want that, but what I’ve gotten out of my business is all of those things. You identified as a perfect example. I had the privilege of my career before I got full-time into business ownership. I was traveling, I was in sales. I traveled most of the nineties on American Airlines alone. I did 2 million miles in that span, and that was the only airline I traveled.

Henry Lopez (49:27):

And most of that was Dallas, Houston, Dallas Houston, Dallas, Houston. Then my daughter was born, and it all coincided. Well, thank goodness, some of it was luck. Some of it was my effort, so that as she was growing up, I was there. I was there. I don’t think I maybe can list on one hand if I was pressed functions or events that I couldn’t attend because daddy was busy or daddy was traveling. So that value, it is priceless for me. And that was afforded quote because I was a business owner and I had control to a great extent over my time and place.

David Barnett (50:06):

Yeah, I hear you. I mean, the reason that I am in the business I am today in its current iteration is because my kids, I got a divorce and I did not want my kids to be going to daycare after school. And so I had to figure out how can I create a full-time income for myself between nine and one 30 in the afternoon? And so this is where I’m at, and it’s worked out beautifully, and the kids now are getting their driver’s licenses and stuff. I know it’s crazy. The time has flown, but I’m so happy that I like yourself that I was always able to be the dad who participated in school activities or all those other things that kids like to do. That’s right.

Henry Lopez (50:47):

You and I weren’t talking about before we started recording, you’re going to take them on a trip and during their spring break, there’s no hesitancy on your part. You don’t have to ask for permission. That’s going to happen because you’re the boss. Yeah,

David Barnett (51:01):

That’s right.

Henry Lopez (51:02):

Yeah. Excellent. Tell us again where we should go to learn more about you and all of your resources.

David Barnett (51:07):

Yeah, sure. So my blog site is kind of the central nervous system of all the stuff that I do. It’s at david c barnett.com, and like I said, find me on YouTube or any of the podcast apps. Just look up David Barnett’s small business, and I should come right up to the top.

Henry Lopez (51:21):

Oh, absolutely. There’s two T’s on Barnett at the end. Thank you, David. It, as always, great to have this conversation. Thanks for coming back on the show. Your jacket will be mailed to you once it gets tailored. Who knows when that’ll be, and thank you so much. Always appreciate the conversation. Always enlightening. Thanks for taking the time to be with me today.

David Barnett (51:42):

Thanks, Henry. Thanks for the invitation. Always a lot of fun.

Henry Lopez (51:46):

This is Henry Lopez. That’s David Barnett. Thanks for joining us for this episode of The How of Business. I release new episodes every Monday morning, and you can find a show anywhere you listen to podcast, including at my YouTube channel, as well as on my website, the how of business.com. Thanks again for listening.