051: Learn the Steps in Buying and Selling Businesses with David Barnett

There are times that the greatest opportunities in our lives come to us as trials that will make us question the facts that we’ve been taught. As a business broker, David Barnett sold 36 companies in a span of three years. Now he is a business advisor who helps small business owners in buying and selling businesses. But what drives David more is the desire to help people get into the jobs that they want and the ones that reward them for their hard work.

My guest is a business expert who took ten years to unlearn what he was thought in business school. Why? Because business school teaches you how to work inside of a company, in fact, big companies, which left him unprepared to start a small business. Today, he helps small business owners after successfully building his own. Publishing four books and knows more about how to value companies than most people forget.

Learn the Steps in Buying and Selling Businesses with David Barnett

Welcome, David Barnett, to the show.

Mitch, how are you doing today?

Great. Welcome, David. I’m glad that you’re here. I want to make sure now, I said that you published four business books. Did you publish more than four or it’s just the four that I saw on your site?

Yes, I got four that are actually in print like you can hold them in your hand with paper. I think I’m up to seven or eight now if you include the eBooks and all the special reports and everything else.

David, the reason we selected you to be on the show is because what we’re here to do is help entrepreneurs. The way we do that is by looking for those moments in time where some wisdom was gained typically through failures. Let’s go back in time with you. Tell us a little bit about what happened after business school and how got excited about and interested in what you’re doing today?

When I got out of business school, I ended up working for a Yellow Pages publisher. I was out there. I was the salesperson. I got to meet and talk with the owners and managers of all kinds of small and medium-size businesses. I would ask them similar questions, “When the phone next rings, who do you want to be on the other end of your phone? Who are you looking for as far as a client?” My job was to try to create programs in the phone book to draw those people out, to make the phone ring. This was back in the 90s when the Yellow Pages was still a very relevant media as far as advertising. If you typed plumber into Google in those days, you’d get a plumbing outfit in California no matter where you were in the world because they haven’t figured out that localization yet that they are so good at today.

I would talk with all these people. I was at the Yellow Pages a little over seven years and learned a tremendous amount. When I started to think about my future, I had to admit that I didn’t necessarily believe that there would still be a phone book in about ten years time and we are seeing that today obviously in a lot of places. I think you even have to opt-in now to receive a printed phonebook because so many people are using the internet.

I left the Yellow Pages publisher and I started a business with a friend and we were serving homeowners. Basically, it was a home service company. I wasn’t really happy talking with consumers and homeowners. I was really missing the days when I was in the Yellow Pages dealing with business owners. After about a year and a half, Mitch, I left that business. We actually sold it. I went and I opened up another new business, this time a commercial debt brokerage. I started to broker commercial mortgages, business loans, what I call factoring facilities when we sell accounts receivable to turn them into cash, operating leases, capital leases on equipment. Things are going well in that business until we got into that financial crisis in ’07, ‘08 and literally in a six-month period of time, half of my sources of financing went under. I began to realize that my pipeline was drying up and I wasn’t going to be able to make a go doing this finance brokerage. One of the opportunities that had made itself apparent to me when I was helping business people find money, was that there was a real need in my local marketplace for qualified people to help people who are trying to buy and sell businesses.

YFTC 051 | Buying and Selling Businesses

Buying and Selling Businesses: There was a real need in my local marketplace for qualified people to help people who are trying to buy and sell businesses.

I’ll tell you one quick story just to illustrate. I had a call from a Main Street Banker and she called me up and she said, “Dave, I’ve got this lovely couple. They’re trying to buy a convenience store. They are working with a real estate agent who has written up a contract to buy a convenience on a home purchase agreement and it says they have ten days to get 95% financing.” Those types of terms are what we use when we buy a house. It doesn’t work in the world of business. These people were spending their time trying to execute a deal with an intermediary that had no idea how to do a deal. I realized that this was an opportunity. I went looking for a way to learn this business and I found an international business brokerage brand and I basically joined up with them because they had access to training. I was actually one of the first people in my market to be certified in the world of buying and selling businesses. About a year afterward, I bought the business brokerage office from the owner and I ran that for another three and a half years.

Over the course of those three years, I sold 36 companies for other people. I was by almost any measure one of the most successful business brokers who has ever operated here in my hometown. Now, here’s the problem. When you list a business for sale, when you’re a broker, it’s like the real estate model. Business owners, they sign up with you and then you go and try to find a buyer for that business. The business broker is paid when the business is sold. Even though I sold a lot of businesses over that three-year period, it doesn’t demonstrate the fact that there were three drought periods of seven to nine months each where there were no closings. The rollercoaster of cash flow in that business was crazy. If you look at my photo online, you’re going to find that I’ve got gray hair above my ears on both sides on my head and I can tell you that gray hair came from that period of my life.

I’m in my 40’s now, Mitch. It was a pretty stressful time in my life. I remember one night I was in bed, there was a deal that was supposed to have closed that day. It got delayed again. I was really trying to figure out how I was going to get the money to pay my assistant because her payday was the next day. I ended up taking a cash advance on a personal credit card so I could cover her paycheck. That was one of the beginnings of me understanding that I had to get out of that business. I wasn’t able to make any kind of budget. I wasn’t able to plan. It didn’t seem to matter how many different businesses I have for sale. Everyone involved in a business brokerage deal usually has a reliable and constant stream of income except the broker.

The seller, if he owns a profitable company, the longer the sale gets delayed, the more money he makes because he has a profitable company. The buyers typically own other businesses or they are employed somewhere and they’re going to quit their job or they’re going to grow the business that they have so they have an income coming in. The lawyers, of course, have many clients. They’re billing all the time as well as the accountants and the bankers. If you have to deal with any kind of government officials for licensing and stuff like that, those people are all on salary.

When things happen that cause a delay in the deal, everyone just shrugs their shoulders and people say how unfortunate it is but the broker is waiting to be paid. The brokers got bills to pay and that was me. I was constantly under the stress of making sure these deals were going to close and it all came to a head in 2011. I went away on a vacation and I knew that I had six deals closing that fall that were going to bring in a quarter of a million dollars in commissions. It was going to be that payday that I’ve been waiting for the whole time. When I got back, one deal fell apart because a bank rescinded a funding letter they had issued. The second deal fell apart because a government regulatory body wouldn’t issue a license to the buyer. It was a regulated industry. The third deal fell apart because a franchisor acted like a real jerk to the buyer and the buyer said, “I’d love to buy this business but I will not do business with those guys.”

Three of my six deals fell apart. That quarter of a million shrunk to $110,000. When that money came in, I’d paid off all of my debts and I said, “I’ve had enough. I’m done.” I sold the office to one of my associates and I got out of there.

Let’s take a look at that moment in time. First of all, if I ever did a poll how many of my guests on this show used a credit card to pay payroll, I think it would be more than ten. It’s very common as you probably realize. I know I did. I reached a point in my business when we were waiting for payment from distribution. We had a retail product in distribution and we had $480,000 owed to us but we could not make payroll and our credit line was completely tapped.

YFTC 051 | Buying and Selling Businesses

Buying and Selling Businesses: It’s very common for small business owners to extend themselves in ways they never dreamed they would when they first started.

My partner and I, we basically went into our pockets. We went to the bank and we took out as much as we could basically and we made payroll. It’s very common for small business owners to extend themselves in ways they never dreamed they would when they first started. It was great to hear that story. It made me feel once again that this a very common path for many of us. Let’s take a look at that moment when those three out of six deals dropped out and you said, “I’ve had enough.” What is it that you had enough of and why in particular after earning a $110,000 did you not say to yourself, “I could start working on the next batch and make another $110,000 and heck, that’s a nice living anyway.”

Actually, it related to me talking with a buyer who had come into my office and they were looking for a business opportunity and they said, “I really haven’t put a lot of thought into this. What kind of business do you think I should buy? What would you recommend?” I said, “You should buy a business where you can develop a clientele and have a lot of repeat business, a regular cash flow, etc.” As I was describing the ideal business to this person, it slowly dawned from the back of my head. This idea came forward. It said, “David you’re in a business that has none of these attributes.” Every person that I met to buy or sell, I had to fight like crazy to get them as a client and then once I did business with them, most of them never came back. The sellers would retire and the buyers would be happy doing their new thing and then I’d have to fight for the next one.

Think about it if you were selling pools, how many repeat buyers do you have? You have to develop that cash flow, that stream of products that go along with what you do. Could you have done that? Could you have developed say accounting services for business owners, payroll services? Could you have set-up a company to help the companies who you sold do business and earn a living that way?

It’s a great idea and I think that’s probably why a lot of pool companies also do pool service. They build them and then they build in their own customers, the same with a car dealership idea. You sell someone a car and then you get them in to do the oil changes and whatnot. I think the difference in what I was doing as a business broker is that I was holding myself out as a real specialist. I’m not a real estate agent. I’m not a person that deals in commercial property. I only help people buy and sell businesses and that’s why I’m great at it because of the special field of knowledge. Then to turn around afterward and say, “I can also do accounting and tax preparation and HR and payroll,” number one, I don’t think I could have been able to do those other things very well. I probably could have developed referral relationships maybe to send people to some of those service providers. I was involved in a business where some of the service providers were sending me clients as well. I didn’t want to single out one or two of them to be beneficiaries of all my referrals because that would impact my lead generation from all the other guys in that business.

Eventually though, when I got out of that office, what really was interesting is I said, “I don’t know what I’m going to do now but I need an income.” I went and I started a new career. I actually got a job. That’s one of the worst things that can happen to an entrepreneur, I know. I went out and I got a job. I became a banker. I covered quite a large territory. I used to spend hours in my car. It was about two and a half months after I left the business brokerage office that I got a call on my cell phone and it was a guy who wanted to sell his business and he said, “I was told that you’re the guy who can help me.” I said, “I used to be a business broker but I’m no longer. I’m sorry I can’t help you,” and then I let the gentleman go.

A week later, Mitch, the phone rang again and it was another different person who had been referred to me by somebody else. They said, “I’m trying to buy this business that I found. I’ve got all this information and my lawyer is giving me some advice and my accountant is giving me some advice. They really are just talking about the stuff they know and neither of them seems to be able to advise me on what next step I should take in the process of the negotiation. They don’t seem to be giving me insight into ways that I might structure the deal to be more beneficial. They tell me what I should make it look like at the end but they don’t tell me how to get there. They don’t seem to take into consideration what the other party wants, which I’m trying to make a win-win deal as part of a winning negotiation.”

I thought for just a few seconds and I said, “Yes, I do know what I need to know to help you. I used to be a business broker. I can help you now to get through this process but I’m not a broker anymore. If I’m going to work with you, it’s going to be on a consulting basis and I have a full-time job. I can only work with you in the evenings and the weekends. I’ll have to charge you by the hour,” and then I just waited. A few moments of silence went by and then suddenly this guy said, “You can meet me Saturday at 9?” I said, “Yeah, I can meet you Saturday at 9.” That was the moment that my next business was actually born.

I like to think about it as the universe brings you an opportunity and you could either say, “No, thank you. I don’t do that anymore,” or you could basically pivot which is what you did, accept it and now be in a new business. That’s a great story. I think for me the lesson is that if you’re always looking for opportunity, no matter what you’re doing now, even if what you’re doing now is working, if you always have that eye open and you’re always evaluating how can I get involved? Does this make sense? Could this be my pivot? I think you’ll notice and recognize that opportunity. Sometimes these opportunities, David, they show up as problems. They don’t even show up as opportunities but once you solved that problem, they could be huge. It sounds like now your Saturday mornings were occupied with your new passion. Tell me what happened as that got going?

It’s interesting because what started to happen was my phone kept ringing and it was the carryover from my business broker days were people knew my name here in the local area. I started to do more and more work with clients on a consulting basis. All of the stresses and problems that were associated with the business brokers didn’t exist in this new business. I was just trading time for money, I know that. I’ll be working with people and I’d send them invoices and they’d pay me. The cash flow was regular. The cash flow was there. What I began to realize was that basically, when I got those two phone calls in the car, I like to think of it as the market talking to me. I realized the market had been talking to me for years. For years, people were coming in, business owners, in particular, coming in wanting to talk with me about selling their business but they didn’t want to hire me as a broker.

What has been revealed is the fact that there are a lot of business owners out there who are very smart and intelligent business people. They pretty much figure that they know how to do a deal but they know that there are certain specific areas of expertise that they don’t have. That’s why most business owners when they have to do IRS forms, they need to file their taxes, they get an accountant to do it. When they decide they’re going to sue someone, they call their attorney.

I realized there’s room for the same kind of professional in the world of transactions. When I opened myself up to that realization, that’s when the doors really opened. That’s when I started calling myself a private transaction advisor because I don’t buy and sell businesses on other people’s behalf anymore. I simply work with people who are going through the process on their own and I give them the guidance, advice and I do certain specific tasks that business brokers typically do. I do them for my clients on a fee basis instead of on a commission or contingency basis.

Basically, David, what I’m hearing is that you’re basically a business consultant. The thing that’s good about business consulting is that if you have a market and you could serve that market, as you implied earlier, then you were able to trade your hours for dollars. That I think is fine but ultimately what we’re talking about here is scaling into a larger enterprise, a bigger business. Something that produces regular cash flow. In fact, those were your words. Those were the things that you were advising your clients back then. What did you do to get to that point yourself?

You’re right. After about a year, I had to face that question because I remembered my own thoughts from before. I said, “Where is the scalability here? Where do I grow this beyond my own everyday efforts? “It’s funny because the answer actually was in the funnel that I created to build a flow of leads. People who want to buy or sell a business are interested in learning. They’re learning about this topic. I actually sat down. I designed out a way to find those people and attract them to me. The biggest part of that whole system is YouTube and my blog site. Every week I put up a new video and it’s almost always to answer a question brought in by one of the people that are in my audience.

I answer a video and then every one of these new videos becomes another signpost in the wild directing people to me when they go looking for something. Education in a six-minute video is a little snippet of information. For people who really want to learn more, they want to have education in a bigger form. The first series of things I did were the books. I had a book come out every year from 2014 to 2016 and then I developed these workshops and I did them live in front of people so I could see immediate feedback in their eyes. I developed a series of workshops, one on buying businesses, one on selling businesses and the latest one that’s just come out is on preparing a business to buy but also making it more manageable while you wait for that transaction to come.

I created the workshops and then once I have them in a place where I feel that they’re in the right form, then I turn them into electronic eCourses that people can do from anywhere in the world online. That’s the leverage. Over the course of the year, thousands of people will watch my videos. A percentage of them will buy some of my books, some of them will sign up for my online courses and then some of them will do the follow-on courses because some of them exist in the series. Then when they get to point where they’re actually looking at a business opportunity for a buyer, they’ve learned enough in my course to know that it’s not a good opportunity. If they think it might be a good opportunity, then they get to the last stage, which is actually engaging me directly. I only ever have to do anything in the last stage and the last stage, of course, is still the most lucrative stage for me is the highest priced ticket, actually using my time. I’ve been able to develop a stream of income from people who are moving their way through this customer journey even though most of the people don’t ever get to the end, I still get paid.

As we all know, there’s a huge market for people who want to learn. I hate to say it but most people spend more time learning than doing. For those of us that are in that business, it’s fine. It’s great. Ideally, it’s the doers that make the difference. You said earlier that the magic is in the funnel. David, what I want to know is when you decided to start putting those videos out on YouTube, how did you know exactly how to get people to those videos? Did you advertise? What were your promotional efforts?

It’s a really great question. Basically, what I started to do is in the beginning, I asked what do I think people want to know? I started making videos with a certain degree of success. Then when I had some followers, I started asking them, what do you want to know? I was blown away by the questions. I probably would never have guessed most of them. They were either very, very simple. There were questions that I would probably not have even dreamed that people would have or they were specific to a certain type of industry or they were very complex. As I started creating more and more videos, what I did is I did a little research on my own to learn about how systems like YouTube operate. I actually worked with a guy who had a program of YouTube videos and I learned about the two different search algorithms that exist within YouTube.

There’s the main search algorithm. When you type something into YouTube and it will bring you videos on that topic, then there is what’s called the referral algorithm. This I believe is the really powerful one. The referral algorithm, what it does is it measures videos but it also takes into account what they call the authority of the channel. Many people will tell me that they’re looking for information on a certain question or topic that relates to business purchase or sale and they’ll find somebody else’s video. They’ll watch that video. When the screen comes to the end, they have twelve different suggested videos, some people will tell me that up to ten of those suggested videos could be mine.

I’m starting to understand this and this is something new for me. I did not understand the referral algorithm before. Let’s say you’re in a business, and we don’t even need to make up the name of one. Let’s just say it’s a business and you service customers or clients, how do you then take advantage of their referral algorithm? Does that mean you need to get laser-like focused on your topic or do you need to do the opposite, get broad into a specific area?

The way that the referral algorithm works is it works by understanding that a certain channel may have authority on certain topics. Because I have so many videos on a very narrow topic range, it says that things that come from this channel are authoritative and knowledgeable. Somebody’s specific search term may actually match better in someone else’s video. How to buy a gel nail salon? I don’t have a video on that. Somebody else may have a video on that so that will come up. The fact that someone is searching on the topic of buying a business, the referral algorithm is going to say, “If they want to learn about that, there’s 200 videos on that over here, David Barnett.” What then ends up happening is people come in to my circle and then they start watching one video after another and that’s how they become part of my audience.

Now, what starts to happen obviously is you start incorporating your YouTube videos into the rest of your funnel I would assume. Tell us how you do that.

People see me all over. I was interviewed on another podcast where someone said, “I see you everywhere. How do you have the time to produce all that content?” The reality is what I do is I produce videos. I sometimes produce four or five at a time and that will give me more than a month’s worth. I’ll take the video and then I’ll write a little article about the video, maybe 200 words. It’s more of an enticement to get people to watch the video. Above everything else, I want people to watch the video.

You can read things that I’ve written but when you watch me on video, you can get to know me. People buy from people that they know, like and trust. The more people watch me on video, the more they are going to know who I am and know that I’m knowledgeable and trustworthy and I can help them. The article entices people to watch the video and then I put that in a lot of different places. It goes on LinkedIn, it goes on my blog, it goes on Facebook, it gets tweeted out, it goes on Medium.com, anywhere basically that I can put it out. The audio gets ripped off with a video and it goes out to iTunes because a lot of people listen to me there as well.

People come into my audience because they are curious about the topic or because they have a deal that’s imminent. If they’re curious to learn more, they start investing in my courses and then when they actually have a deal at hand, either a buyer or a seller, the cost of screwing up a business acquisition or divestiture can be huge. The reason people ultimately contact me from what I get back from speaking with them is it’s almost like they’re buying insurance. They can spend a few thousand dollars with me to avoid perhaps a quarter or a half-million-dollar mistake.

That’s a great strategy. I really like what you’re doing. It makes a lot of sense. I also think it’s easily duplicated. This is some great information here. Go take what you do, record a short video and then post all over the place. I love that, David. That’s very, very good, simple and effective which is what I like.

I also wanted to mention to you, I had sold a software company for eight figures and then I had bought three software companies over the course of the next few years. We basically hardly knew what we were doing. I would have loved to have had someone like you advising us. Like you’ve said, a small amount of money for what potentially could have either saved us a lot or gained us a lot more. I’m really glad that you’re doing this and I’m glad that we get to tell people about what you’re doing. Particularly the courses, I think the courses prepares somebody’s thinking when they have that thought, “I’ve been in this business now for thirteen years. I have been thinking one day it would be nice to sell. What do I got to do to prepare that business to be sold?” Can you give us a couple of tips there and tell us a little bit about that?

YFTC 051 | Buying and Selling Businesses

Buying and Selling Businesses: 12 Things To Do Before Selling Your Business

I’ve actually got a book I called 12 Things to do Before You Consider Selling Your Business. When I was a business broker, I would meet a lot of people who were really burnt out and tired of their business and so they wanted to sell it. When I started looking under the hood at what they were doing, I realized that they didn’t have anything in place to help manage the business. It was basically the owner trying to run everything in their head while telling some staff members to do certain tasks. Many, many businesses out there run this way and it’s the whole topic of that book, The E-Myth by Michael Gerber. I had read E-Myth and I’ve used those principles when I created my first business after my Yellow Pages days. I knew how effective it could be to have processes and systems and checklist and all that kind of thing. I would talk with these business owners. I would say, “You are let’s say a roofer, you run three crews. You do all the purchasing, you handle all the advertising, you do all the hiring and firing, you’re doing all the sales. The only person who is ever going to be able to buy this business is somebody exactly like you.” That’s a very small, small niche market.

If we can apply some processes and procedures and methodologies, we can start to do something that you’ve never been able to do which is instead of simply delegating tasks like, “You do this work,” we can start to delegate responsibility. We can start to say, “You are responsible for making sure we do the purchasing and have all the supplies we need this week. Here are all the work orders that we’re going to do that you can get the information from.” Once you start to have a process, you can then start to outsource out of your own mind these different things that clog up the entrepreneurs head. We all know business owners who have been working for twenty years, seven days a week, they couldn’t take a vacation because they’ve never put these systems into place.

I would tell these business owners, “This is what you have to do,” and then I would tell them to read that book. I gave the book to a couple of people, which was even worse because then they wouldn’t read it. People were so overwhelmed by the thought of having to sit down and write out what goes on in their business and create org charts and all those kinds of thing. What I realized I needed to do was I actually needed to take a page out of Gerber’s book and I needed to create a system for systematizing operating small businesses.

I created this process. I call it 12+1 steps. Step by step, every step is very easy. It’s simple to do and what was happening is as people were moving through the process, they would start to take their businesses off the market. What was happening is they were actually starting to get a handle on the business. They were able to run it better, identify the real bottlenecks and problems and solve those problems and suddenly their business was becoming easier to run and more profitable. The big reasons why they wanted to sell started to disappear. Basically back in those days, I was helping these people get their business ready to sell because I wanted to earn a commission and they wouldn’t want to sell it and I wouldn’t earn a commission. Today, I take that process and people pay me to help them implement it. It’s a topic of an online course that I have called Build a Business That People Will Want to Buy.

Back in the days, we used to do this thing called the job book. It was one of the first things that we would do once a new person was fully up to speed. Typically, four to six months into their employment, we would say, “We have a bonus sitting here for you, a thousand-dollar bonus. What we want you to do is create a job book. What you’re doing is basically documenting every single element of how you do your job.” Later, that job book became essential. First of all, it allows us to replace that person very easily but more importantly, what it did was it showed us a lot of the inefficiencies of what they were doing. We are able to really tune up the organization by reading the job books and helping people optimize the way they did their job.

By the way, you mentioned Michael Gerber several times. Just as a plug, Michael and I are going to be doing a very long, two and a half hour show. We will probably do it in two parts where we will be going through not just The E-Myth but Beyond The E-Myth, his new program which if you have not read that book is unbelievable. You really need to read the book. You’ll love it if you read The E-Myth. It’s all the same stuff in the sense that we are really talking about finding ways to optimize, systematize and then basically spread the word. That’s apparently what you’re doing with your training and in your consulting practices. Is that right?

Yes, exactly. My desire is to help people, number one, get out of jobs that they hate, that’s draining their energy and leave them without the real benefits and fruits that life should be bringing us. You can be a person that works for a wage or a salary and you are never going to get beyond just trading your time for money. The way that you do grow beyond that is through business ownership where you can actually start to leverage other people’s efforts. As long as you direct it properly, you get to then enjoy not only the fruits of your labor but the fruits of investing your capital, both your intellectual capital and your money. I want to help people get out of jobs they hate. On the other end, I want people to enjoy those businesses and be able to enjoy all the benefits of being in business and then when the moment is right, to get out and get out in a way that allows them to exit without the business being damaged.

In popular culture, we are always hearing stories about the Silicon Valley entrepreneur that sells for hundreds of millions of dollars. It sounds like you had a really great exit at one point with your software business as well. The truth to the matter is most small businesses are put up for sale when the owner has a pressing personal motivation. Most small businesses, people don’t want to sell them because they need the income. The purpose of the business is to support the family. The top five reasons why businesses are put up for sale are burned out, divorce, poor health, retirement and relocation and only one of these things is planned for. I’m always telling people, “You have to be running your business as though it was for sale because not only is it easier to manage and more profitable, but the day that comes when you do need to sell, you likely won’t see it coming.”

When people’s businesses are not ready to sell, what ends up happening is this. They have to struggle through these personal problems while trying to manage the business and get it ready for sale. What ends up happening is they lose their focus on running the business. Their passion usually isn’t there in the same way it was before because they are being distracted by this personal thing going on in their lives. Their attitude comes through in the business in subtle ways like not returning client calls in time or not replacing the person that needs to be replaced because it’s easier just to leave them there. Meanwhile, they don’t give good service to your customers. All these little things start to happen and what the result of that is that the top one will start to erode and then the bottom one starts to erode. Once you have a trend of decline, businesses are valued on cash flow as a function of the risk perceived in that industry. If your cash flow goes down and it’s in a declining pattern, your business is worth a lot less.

David, I’m going to tell you about the way I ran my business and why I was dumb to do it this way. We were growing very quickly and we needed as much cash as we can get our hands on. When it came to the end of the year, we would try and pre-pay for many, many things to prevent paying a tax on profits. By the time six, seven years rolled around when we were already starting to think about selling, here we had was basically a breakeven company even though we were actually wildly profitable. We were just dumb about how to structure our books in such a way so that it showed the profit and we should have just paid taxes like everybody else.

What we ended up doing at that point was getting someone like you to come in and give us some advice and we completely changed the way we managed our books. Not the way we managed the business, the way we managed the books. We started to show a profit literally the first quarter and that profit rose every quarter for eight more quarters until we eventually sold the company. The fact is that profit was always there. We just chose not to show it so we didn’t pay taxes. Do you find that’s common among business owners?

Yes. Taxes hurt. People don’t like to pay them but paying taxes is a barometer of success. In large businesses, people engage like you did in different accounting strategies and things that are available to them to minimize their tax bills. In a lot of really small businesses though, people don’t have the accounting resources for that so they resort to other things like giving their children company cell phones, things like that which reduces the net income and lowers the tax bill. What it does is it muddies up the financial statements and it creates two problems. Number one, when you go to sell, you then have to get granular and explain why Sarah’s cell phone isn’t a true business expense and some buyers will agree to that kind of thing. Number two, it means that you no longer can use your own financials for making management decisions because you muddied them so much they don’t tell the true picture of what’s going on.

YFTC 051 | Buying and Selling Businesses

Buying and Selling Businesses: Taxes hurt. People don’t like to pay them but paying taxes is a barometer of success.

If your financial statements are unavailable monthly to help you make decisions in the business, that’s when people get into trouble because things will start to slip. Their gross margin will slip by a couple of percentage points and they won’t notice. They’ll think, “It’s just a couple of points,” but in a million-dollar company, that’s $20,000. Then you get to the end of the year and all of a sudden, you have disappointing financials that you should have known the performance was off several months before but your financials weren’t there to tell you what was going on the business. I see it so often that people go to these great ends to avoid taxes and end up really hurting themselves and eroding the value of the business.

I can attest to that, David, because we went through it. Let me tell you something else that most people don’t realize. At the end of the process, when you decide to sell your business, there is something that is worse than standing naked in front of a firing squad. You probably know what I’m about to say, it’s called due diligence. I’ve got to tell you one quick story. We’re in the lawyer’s office and we have the buyer who is located in another state on the phone on a conference line and we have their attorneys and our attorneys and we’re going through all the documents. All of the sudden the opposing counsel, the other side basically says, “We’ve looked through your source code and there’s this block of code that’s documented, looks like in Russian. Did you do that? Is that yours? Where did this code come from?” My partner without thinking about it says, “Yes. We’ve hired some contractors out of Ukraine to write this routine, which we didn’t have time to do.” You can imagine what the next statement that came from the other side is.

“Do you own it?”

Exactly, “Do you own it and we need to see a statement of ownership of that snippet of code,” and we literally panicked. All of the sudden we started calling phone numbers in the Ukraine that we hadn’t used in years and through luck and chance, we happen to catch this guy at home and said, “Would it be possible for you to sign a document that we faxed over to you and could you fax it right back?” He was nice enough to say, “Sure. No problem.” Within twenty minutes, we resolved it. That could have sunk the deal. That one little thing. Has that ever happen to you?

I haven’t had deals fall apart on that kind of little thing at the very end, but I credit my training and the experienced business brokers that I learned from for that. While I was a business broker, we didn’t do due diligence for our clients. We coach them through it and gave them exhaustive lists of things they needed to do simply for this very reason. We didn’t want as brokers to invest months or years of our time into a deal only to have it fall apart at the end from something like that. We took great pains to make sure that everyone looked at all the things you could possibly imagine. At the end of the day, we ask people to sign things saying that we couldn’t be held accountable for anything that was represented. Our buyers had to do a good job of doing due diligence and so we needed to make sure that they actually have the tools to do a thorough due diligence so that ultimately, legally, we are protected as well.

David, this has been a great conversation. I think you and I could probably go on for hours on this topic. Let me ask you a question. You said at the beginning of the show before we started recording that you had something special for my listeners.

Mitch, what I’d like to do is give everyone a special offer if I could. If anyone owns a business and they want to learn about the thirteen steps that I described, it’s a half day video presentation that comes with a workbook and all the tools and spreadsheets and everything that I use with my clients. If you go to EasySmallBizSystems.com and put Mitch in as a discount code, I’ll even give you a special price. The online course there is called Build a Business That People Will Want to Buy. If you go through the process, not only will your business become more saleable when the time comes, but it’s going to be easy to run and more profitable today.

Thank you, David. If you are in the position where you need to sell your business or you’re looking to buy one, I would spend a little time on David’s YouTube channel and getting this information from David because it’s going to be priceless to you. David, I have two questions for you. The first one is one of my favorites. Who, in all of space and time, would you like to have one hour to enjoy a walk in the park, a quick lunch or an intense conversation with?

Mitch, it’s a pretty easy question for me. That would be my mother. She, unfortunately, was taken from us far too soon in life. It’s been a little over a decade but it would definitely be with her.

I love to reflect on the answers that people give and I think this is the first time anyone has ever said their mom. Thank you for saying that. It makes me feel nice and warm inside when you do. I’m glad that you had that thought. I’m glad I could bring that thought to you. Here’s the next question and this is what I call the grand finale. It’s the change the world question. What is it that you are doing or would like to do that truly has the potential to literally change the world?

I think it’s what I’m doing right now and I’m putting information out there. I got a really touching email that was a message over LinkedIn actually from a gentleman from Vancouver on the West Coast of Canada. He said that he was reading my blog post and watching my videos. He wished that he had known me three years earlier because he probably would have saved about $300,000. He lost his life savings and ended up going bankrupt because he got into a bad deal and he didn’t know how to recognize it as a bad deal. Every time I create a video that talks about some of the problems that people face when they are either buying or selling a business, I’m adding to that common pool of knowledge available to all of us out there. I want to make it more difficult for people who have the intention of committing fraud or lying to people to get their money. I want to make it harder for them to find their next target.

I think it’s a great mission, David. I’m there with you. David Barnett, thank you so much for your time. I sincerely enjoyed our time together. David, we will talk again. Thank you.

Thanks, Mitch.

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