Small Business Buying, Building and Selling

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To my knowledge, there is no other blog or book or lesson or presenter who shows someone the basic pieces necessary to generate wealth with real world experience as I will. It’s the nuts and bolts of the whole buy, build, sell process.

There are basically 4 steps:

1. Preparing – What you need to know prior to getting started.
2. Buying – How to find, value, negotiate, and purchase a business.
3. Building – What you can do quickly to increase the value of the business.
4. Selling – The ins and outs of selling your business.

Preparing

Ironically, as my most recent blog has pointed out (it’s ironic because it took me 18 months to write the blog that I should have written first), the most important part is your mindset and your attitude. Next, you’ll also need to take the first 3 steps to becoming wealthy including, always spending less than you earn, understanding the difference between where you are and where you want to be is education, and framing your goals into  Do x Be = Have context. Possibly most importantly, you need to have a clear motivation for being an entrepreneur (even if it’s different than mine) and you need to appreciate that the ethical route is always the most profitable. And make sure you’re able to get over your fear of failure in trying new things.

It’s important to understand that there’s no better, quicker way to go from very little money (let’s say less than $5,000) to a lot of money. You can even take it to the next level and setup a business to generate $1,000,000 per year if that’s your desire. Recently, as part of another blog, I’ve outlined a basic plan for how someone can go from $5,000 or less to $1,000,000 primarily through business. To stress the point even further that buy, build, sell is the best way to generate wealth for the average individual, review my suggestion to skip getting your MBA and just buy a small business for your business education.

Buying

In the buy, build, sell strategy, the part that will have the greatest influence on your profit is the purchase price so learn as much as you can for this stage.

First, you’ll want to know some basic questions to ask the seller about their business and maybe even what questions to ask about any given business idea. Then you’ll have to understand how banks value a business in case you need to go to them for financing and also how EBIDTA can tie into business values (since sellers and business brokers may reference it). As you start looking for businesses, you need to have some ideas of where to find businesses for sale for little money down and how to deal with the business brokers once you find one you’re interested in.

Before you start making any offers, it’s very important that you get the seller (or broker) to like you since then they’ll be more likely to accept your business valuation. It’s very simple to turn someone down you don’t like anyway. Once you’re ready to make an offer, make sure you only purchase the assets and then put them into an LLC filing as an S-corp. If you do that, you won’t have to spend nearly as much time fighting with lawyers. But since you may need one anyway here are a few tips for getting the best rates from your lawyer.

When you’re just starting out you may be considering a partner but make sure you don’t take on a business partner unless absolutely necessary.

Building

In the building stage you’re going to need to know what to do your first 2 weeks onsite at a business you’ve just purchased. If you don’t already know the difference between profits and cashflow, I’m sure you’ll learn very quickly.

Immediately you need to work on polarizing your company’s culture, improving teamwork, and communicating effectively. Right out of the gate you need to start setting up your business for running without you through the effective use of technology, incentives, and empowering your team. If you don’t do that immediately, you’ll soon be asked to do lots of things “in” the business that will take away from you working “on” the business. This is vitally important because if you’re not working on the business you’re not taking the time necessary to double profits, improve marketing, teach your team the importance of NLP, create systems, processes and scripts, or improve closing ratios. In other words, your primary focus for building value in your business is going to entail 3 parts:

1. Increasing Sales – through new and improved marketing and better conversion rates. In other words you have to make sure your system for taking a lead and converting it to a customer is top-notch. Don’t forget that your back-end sales (sales to existing customers) will always be your most profitable business. With that in mind, if you can buy an already profitable business that’s horrible at back-end sales you can quickly increase its value.
2. Cutting Costs – look at all of your expenses and simply cut those that aren’t needed. We reworked our accounting and phone costs alone to save thousands of dollars per year.
3. Improving Efficiencies – this is primarily about scripts, systems, and processes for every aspect of your business.

Don’t make the mistake I did and wait until cash gets tight to realize that cashflow is king and then start building recurring revenue while looking for quick, easy, cheap ways to generate immediate cashflow.

Chances are you’re going to run into some issues with team members so it’s helpful to know the proper way to fire someone without having to pay unemployment and effective ways to get your team members to do what they do best.

As you’re building your business you need to work on getting it to achieve critical mass by, in particular, hiring or training the 3 leaders every business needs to succeed.

In summary, you need to have a game plan from day one including an exit strategy or else you might end up like one of the 300 businesses in NYC who failed because they failed to plan for success.

Selling

Since this blog is getting long and selling isn’t much different than buying I’ll keep this short. You need to basically understand 3 things:

1. How to value your business just the same as discussed in buying so you can justify your price.
2. Where to list your business which is again the same places where you’d go to find a business for sale (such as bizbuysell.com)
3. How to foster relationships so that when it’s time to sell, you have a few personal contacts in mind.

With regards to the 3rd, you may want to get to know other business owners in your area who have complimentary (or even competing businesses). You may also consider hiring a leader who would like to take over and own their own business some day. If you have a franchise like mine, you will also want to stay in touch with owners in other areas as they might want to expand their operations.

The goal with this post is to organize and direct the many varied posts I’ve written about my adventure buying, building, and now selling my business over the last 18 months. As I add more posts I’ll try to keep this summary updated so you can always reference it for new material.

To your generating-wealth-through-business success, Bryan

*DISCLAIMER: I am a mechanical engineer. (Do I really need to say anything else to emphatically point out that I am not a lawyer or accountant advising you on legal or tax matters?)

So here’s the plan:

Buy the assets of a business, create an LLC that files taxes as an S-corp, and sell the LLC.

First a little background. You have a few options when forming a business entity:

1. Sole-proprietorship – single owner as disregarded (pass-thru) entity
2. Partnership – multiple owners as disregarded entity
3. Sub-S C-corporation – up to 75 shareholders as disregarded entity
4. C-corporation – unlimited shareholders with corporate tax on profits and capital gains on distributions
5. LLC – unlimited members

However when filing your taxes you have to choose one of the top 4 OR an LLC (for legal purposes) filing as one of the top 4 (for tax purposes). So not including all of the types of partnerships (Limited, Family Limited, Master Limited etc. etc. etc.) or Trusts you have about 8 options when forming your business entity. Of those 8 basic options, the LLC filing as a Sub-S seems to be the best for our buy, build, and sell purposes.

Reasons why you want an LLC filing as an S-corporation:

1. An LLC is the simplest legal entity requiring the least amount of corporate formalities.
2. An S-corp is a pass-thru (disregarded) entity so all distributions pass-thru to the owner on his personal tax return and are only taxed on state and federal income (and in several states such as Texas, Tennessee, Nevada, and Wyoming there are no state income taxes).
3. You only pay tax on your Net Profit in your P&L – not on the actual cash distributions.
4. With Amortization, Depreciation, Interest on the loan you used to buy the business, and a Section 179 of your equipment expenses you can have quite a lot of cash distributions with no paper income.

Taxes you won’t have to pay with your LLC filing as an S-corp:

1. FICA – you only pay that on your “reasonable” salary, not on your distributions
2. Self-Employment Tax – this is only necessary with a sole-proprietorship or a partnership
3. Corporate Tax – currently around 34% on the profits of a C-corp plus another 15% capital gains on your distributions (is there any reason a small closely held business would be a C-corp???)

The reason you buy only the assets of a business is your depreciation and amortization schedules start all over again and with the numerous business valuation methods you can always come up with some “goodwill” to amortize. Keep in mind, that amortization is your best friend. It’s a non-cash accounting expense that can save you thousands in taxes. For a more in-depth analysis of Amortization and Depreciation check out my Business Valuation 2 – EBITDA can eat my shorts blog.

The reason you sell the shares of the S-corp is that you can provide vendor financing to the new owner and only pay capital gains little-by-little every month as the payments come in. However if you sell the assets out of the S-corp, you have to pay the entire capital gains up-front EVEN if you’re carrying a note for the new owner. This obviously is the worst part about an S-corp. I believe the only way around paying all of the capital gains up-front on an asset sale would be a Like-Kind exchange. This could be very tough if you’re selling a business to buy another one because it would have to be an extremely similar business and you’d have to meet all the strict deadlines for the transfer (usually less than 90 days). And of course if you’re carrying a note then you may not have the cash to buy that other business. Is there a better way?

Exceptions.

1. If you’re never going to have any income (such as with a rental property or if you have a great accountant) you might as well file your LLC as a partnership or sole-proprietorship. Without income you won’t have to worry about taxes and when you go to sell, you can sell the assets, carry a note and still not have to worry about immediately paying for all of the capital gains. In other words it gives you a bit more flexibility when you go to sell.
2. If you have multiple owners/shareholders and you don’t want the distributions to be evenly split along ownership percentage lines you can’t use an S-corp.
3. If you’re going to buy, build, and sell very quickly (i.e. less than a year) you’re probably better off filing as an LLC sole-proprietor or partnership. I say this because if you can flip a business that quickly you’re probably able to grow it extremely rapidly and your biggest tax concern would be the capital gains on the sale. With the sole-proprietor or partnership you could be flexible and either sell the assets or LLC with vendor financing and not have to pay all of the capital gains up-front.

Unfortunately, I can’t claim that I learned all of this from a single book. As a matter of fact, it took about an hour with my accountant which will cost me about $55. Money well spent!

To your success, Bryan

Freedom. I could stop my blog there, however I like to write too much…

Freedom to do what I want, when I want, how I want. If I find a motorcycle for sale 1500 miles from home (as I just did) and I want to take off a few days to go pick it up and ride it home (as I’m doing this week) then I want the freedom to do that. In other words, freedom with my time. Nothing is more important then that. You can always get more money, you can never get more time.

Financial freedom. This one should be simple to understand. After all I can only do the things I enjoy (traveling, photography, motorcycling, coaching, reading, writing, adventure-sports etc.) if I have the money to afford those things. Is there a better way to get both financial freedom and control of your own time than being a business owner?

So that explains the Buy and Build portion, but what about Selling? What does that have to do with freedom? Most businesses have a certain point at which they’re about to hit “critical mass”. Simply put, that business is ready to explode and just needs the right leader at the helm to guide it along. Rarely do businesses have 2 different points of critical mass, however. In other words, if you find a business that has a great need, is in a great market, and has the potential to double or triple in under 2 years, the chances of doing that again at the end of those 2 years is very slim. However, there are always other business’ available where that is true. You just have to find them before the point at which they hit that critical mass and then sell them at their peak (since the sale price will be based on that most recent sales history).

The other reason for selling is that it gives you complete freedom with your time once again. If you buy, build, and sell a business and cash out a short while later with a few hundred thousand dollars (which is very possible) now you can go buy another business, do the same thing all over again, and make more money… Or you can take a vacation. A trip around the world. A missions trip. Buy that car you always wanted, etc. etc. etc. As Timothy Ferriss points out in The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich, the New Rich don’t save their whole lives so they can hopefully retire and, at 65-70 years of age, start enjoying life. The New Rich understand the goal isn’t a certain amount of money in your bank account, but the amount of freedom you have with the money you make. The New Rich don’t save up for retirement because they take mini-retirements all the time. It could be every year, every 6 months, or every other year. That mini-retirement could be for a month, a year, or 10 years. Now is the time to live your life. Not when you’ve saved up enough vacation days or have $1 million in the bank.

Since buying my 2 most recent businesses, I’ve taken trips to Pennsylvania, Florida, Texas, and am taking another cross-country trip this week. All of those trips required me to be out of the office for anywhere from a day to 7 days (the total will be about 3 weeks). They’re all within 5 months of me buying my first business. In the interest of full-disclosure, when I have been at the office, 7 day work-weeks with 14 hour work days are quite frequent.

So how does one setup their business and life to have those freedoms?

1. You have to be willing to step away from a mistake.
2. You must never lose track of your goal.
3. You must be able to work remotely.
4. You must empower your people.
5. You can NOT be the expert at the product or service of your business.

In a bit more detail:

1. If you buy a business, work 60-80 hours per week, and 6 months later haven’t made any significant progress, you need to get out. Take from that experience what you’ve learned and apply the lessons to the next one. Don’t toil for years. It doesn’t take that long to start seeing specific improvements (i.e. more cash in your pocket and more freedom with your time).
2. For me this is easy. When I was 19 I was diagnosed with Hodgkins Lymphoma. I didn’t think it was that big of a deal. I went through chemo for 6 months and radiation for 3 weeks. It wasn’t fun, but I survived. It never felt to me like it was a near-death experience until 3 years later… My friend, Lindsey Popelas, was 17 at the time of her diagnosis which came within 2 weeks of me learning the same news. After battling for 5 years, it took her life. Why didn’t it take mine? For whatever reason, the Lord wants me here and I KNOW its not to work for 60-80 hours per week for the next 40 years to save up $2 million to retire. Lindsey reminds me of that every day. For that she may be the most influential person I have ever met. That’s a lesson I will never forget. My goal is to have freedom – not job security. Don’t wait till you acquire a deadly illness to resolve to start living your life.
3. Blackberry’s, servers, ubiquitous internet, GPS tracking, Virtual Assistants, IP phones, etc. etc. etc. make working remotely on almost any business a reality. Start making it your reality.
4. If your whole team must look to you to take care of every customer complaint and handle every supplier issue and tell them what to do every day, then you have no freedom. Empower your people to make decisions they can effectively make and then use technology to encourage and monitor them.
5. If you’re the salesman, serviceman, customer service specialist, designer, engineer, doctor, lawyer etc. for your business then what happens when you’re not there? The goal is to leverage the talents of others so that you don’t have to be an expert at anything – except leading and leveraging the talents of others.

The only exception to selling your business is to keep it if your business is on auto-pilot and can work without you or with very minimal input from you. Neither of my businesses are at that point yet. However if I can’t get them to that point then you can be certain I will sell them, take a mini-retirement, and keep my eyes open for the next opportunity.

To your success, Bryan

P.S. In previous jobs of mine I have earned the ability to work remotely from my basement, take vacations when I want, travel extensively, and still make a considerable living. The hardest thing for every business owner is to find and rely on great quality team members. If you’re one of them, then you’ll be amazed at the freedoms your boss will be willing to provide for you.