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Buy a Profitable Business
Knowing how to confidently buy a profitable business at a great price is an awesome way to expand an existing business or take the leap into entrepreneurship.
But if it’s not something you do on a regular basis, your confidence may need some boosting with proven strategies and tips. That’s where today’s guest comes in.
What You’ll Discover About How to Buy a Profitable Business:
* Understanding the different stages of buying a business
* How to find the right team to assist in the process of buying a profitable business
* Why looking for companies who are publicly listed for sale is the wrong way to buy a profitable business
* The smart way of managing risk when buying an existing business
* How to stay focused on the right stuff during the purchase process
* AND much more.
Guest: Richard Parker
RICHARD PARKER has been helping people achieve their dreams of owning a business for over 30 years.
His ‘How To Buy A Good Business At A Great Price’ program has sold over 100,000 copies in more than 80 countries.
He was hired by the Dalio family office and for several years worked as a mentor to one of Ray Dalio’s sons teaching him the art of buying small businesses.
He has personally purchased 13 of his own companies plus one co-investment with purchase prices ranging from $50,000 to over $200 million.
Richard has appeared in Forbes, The New York Times, TheStreet.com, Entrepreneur Magazine, Inc., and has over 200 published articles to his credit.
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How to Confidently Buy a Profitable Business at a Great Price
Hanna: Knowing how to confidently buy a profitable business at a great price is an awesome way to expand an existing business or take the leap into entrepreneurship. But if it’s not something that you do on a regular basis, your confidence may need some boosting with proven strategies and tips. And that’s where today’s guests come in. Stay tuned.
Announcer: This is Business Confidential Now with Hanna Hasl-Kelchner helping you see business issues hiding in plain view that matter to your bottom line.
Hanna: Welcome to Business Confidential Now, the podcast for smart executives, managers and entrepreneurs looking to improve business performance and their bottom line. I’m your host, Hanna Hasl-Kelchner and I have a terrific guest for you today. He’s Richard Parker.
Richard has helped tens of thousands of people acquire businesses, resulting in over $2 billion in transactions with his How to Buy a Good Business at a Great Price program, which has sold over 100,000 copies. Besides teaching people how to do it, he’s also purchased 13 companies of his own, as well as spread his tips and strategies in 200 published articles that have appeared in publications such as Forbes, The New York Times, TheStreet.com, Entrepreneur Magazine and Inc.
Plus, he was also hired by Ray Dalio to teach one of his sons the art of buying small businesses. So, in short, he knows what he’s talking about and that’s why it’s such a pleasure to have him join us today. Welcome to Business Confidential Now, Richard.
Richard: Thank you, Hanna. I appreciate you having me. I hope I can live up to the introduction. Perfect.
Hanna: [Laughter] I’m sure you can because buying a profitable business at a great price is such an intriguing proposition. After all, nobody wants to buy anything at a bad price. But there are just so many moving parts to a business and it’s since it’s not something we order on Amazon that comes with a bunch of reviews, how do you recommend we start the process?
Richard: Well, it’s actually – that’s a great assessment because there – it’s exactly that. There are a lot of moving parts. What I like to tell people is the process of buying a business is not difficult. I mean, it’s doable by anybody. It’s just that it’s complicated. And so, because of the fact that there are many moving parts or in reality, stages to the process, you want to be able to reduce those to bite-sized manageable pieces and follow a proven process and do it in a methodical way so you’re able to address all the key questions and critical situations you’re going to face along the way.
Because most of the individual buyers of smaller businesses are first-time buyers, they’re way out of their swim lane, typically and looking for resources and advice, and how to go about the process, usually ends up causing them to abort the project because it just becomes overwhelming. But on the flip side is if you do this in a good way, in a manageable way, in a proven way and you take it step-by-step and have the right team on your side, it’s certainly manageable and doable. I mean, with – without question.
But certainly, there are a lot of moving parts and that’s what you have to manage.
Hanna: Well, you just hit on two things I’d like to follow up with you on. One, the step-by-step, which ones to start with. And the second thing being the right team. How do you start with finding the right team? Because I would imagine you don’t need everybody all at once. What type of adviser do you need at the beginning and what does the beginning look like?
Richard: Okay. So, there’s a couple of questions there. As far as the advisers at the beginning, actually the advisers come in a little later on as – specifically when we’re talking about attorneys and accountants, they comprise a big part of your team. They’re not required immediately as far as the work to be done. However, you want to get those lined up as soon as possible because you want to make sure you have the right accountant and the right attorney.
And by right attorney, you wanna have someone who specializes in the size businesses that you’re looking to acquire and better yet, in the type of business that you’re looking to acquire. And certainly, if anybody is considering a franchise, then you want an attorney who specializes in franchise law because that is very unique.
On the accountant side, it’s a little easier because the process related to the accounting that’s involved in the due diligence and the financial review, by and large, most accountants can do that. Where you don’t want them involved is related to the valuation because, and we could certainly touch upon that, they’re not really skilled in that area.
However, let’s go back to the first question, which is step-by-step and where you start, one of the big issues that causes prospective business buyers to fall out of the process is immediately surrounding themselves with the wrong people because what happens – and that’s typically friends, family, loved ones, and they’re generally naysayers.
Richard: They’re naysayers because either on the one hand, they’re jealous of what you’re doing or they don’t want you to risk anything. They don’t want you to get hurt. And so, they’re – very often, they’re not a positive influence on the process. So, you have to be very careful who you’re talking to or who you’re seeking advice from or who you’re letting know that you’re thinking about buying a business. But the very initial stages are the following.
The most important piece that a prospective individual buyer has to get to is identifying the business that’s right for them. And so, the process at the beginning, most people – the numbers in our sector, by the way, Hanna, are dismal. Ninety percent of the people who begin the search to buy a business never complete a transaction and that’s because they jump in full bore, without knowledge, without experience, without any track record, without any expertise.
And they start looking at all kinds of businesses for sale that are publicly listed for sale, trying to figure out which, if any, may be right for them and it’s the complete wrong approach. What you have to do is you first have to figure out what the type of business that is right for you and then it’s easy to find and buy it.
Richard: And that often takes a process of elimination. Looking at a bunch of different areas or a bunch of different sectors of businesses meeting with a bunch of different sellers, meeting with business brokers to really whittle down. At the beginning, you may be looking at it like a shotgun, but you want to get to a laser beam. So, you’re looking at a broad array of businesses, but you really have got to get to focus on the type of business that is right for the individual.
And the mantra that I’ve been telling people for decades is, “Whatever it is that you do best has to be the single most important driving factor of the revenue and profits of any business you consider purchasing.” This is the time where you can’t – you’ve got to be brutally honest with yourself at what you’re good at and your skill set. And so, honing in to the type of business that’s right for you, using your greatest skill set and not trying to think that you embellish your weaknesses, that you have to be brutally honest with yourself at what you’re really good at and marry that to the right business.
And that’s really acquiring knowledge, learning about the process and identifying the type of business that’s right for you are really the first steps.
Hanna: I love the way you narrowed that down, Richard, especially about the brutal honesty with your own skill set and what you’re really good at because a lot of other things can be outsourced. And if you’re buying an existing business, you may already have employees that are good at that thing that’s missing. But I can definitely appreciate what you’re saying about knowing what you want first as opposed to, “Well, let me shop and see what I can find” because that’s like buying an item on sale, which, “Oh, the price is great, but it’s really not a good fit.”
And then it winds up in the closet and nobody ever wears it. I’m sure people can identify with that.
Richard: Right.
Hanna: But you mentioned also earlier that a lot of people have never bought a business before, so everything is new. And for the nervous nellies out there and especially the ones that have family saying, “What are you thinking? What? Are you crazy? You can’t do that?” how do they build their confidence to make sure, in a step-by-step fashion that, “Yeah, I’m finding my way and I’m doing it in a way that is not risk-free because nothing is, but I’m looking at opportunities. I’m managing the risk appropriately”?
Richard: So, the way you describe the nervous nellies is great because throughout this process, you wanna have a good combination of excitement and being scared, excitement to keep you motivated and going and scared to make sure you do your – you’re going to be doing your homework and diligence throughout the process. So, how do you gain the confidence is – it comes incrementally and the only way that you’re gonna be able to do that…
So, first of all, let’s talk about family members who say, “Are you – are you out of your mind to be doing this?” or what have you. So, it’s very important when you have family members that everybody is on the same page – spouse, partner, whatever the case may be – that you’re both on the same page to understand, “These are the conditions under which I’m going to be moving forward with a potential transaction, meaning this is certain criteria that the business has.”
“We’re not gonna be risking our house,” whatever the case is, to make both parties comfortable ‘cause you need your family members on site. I mean, that’s – you don’t wanna be doing this without their support. They may be looking at it with one eye closed at the beginning, but that’s okay. But having them understand the conditions under which you’re addressing the risk. And like you said, you can’t eliminate all the risk, but you certainly can mitigate most of it.
And so, getting them involved and conveying to them that you’re not gonna be doing anything stupid, that’s number one. Number two, you have to attach yourself to an individual or to a knowledge base that’s going to provide you with the information that you need throughout this process, so that you’re able to navigate each of these steps and feel confident that you’re doing it in a good way.
Richard: And I’m not trying to do this as a self-promotion related to the materials that we sell, but it’s any materials. It’s any good materials, any helpful materials or individual. Ideally, you wanna get a mentor and ‘cause the easiest way to do something new – I mean, the oldest formula to do anything new successfully is to just find someone who’s already doing it and copy them, and even better yet, get them to mentor you.
So, at the beginning, when – if there is that element of lack of confidence and it is prevalent in a lot of people or a lack of family support, well, attach yourself to somebody or something that provides the knowledge so that you could at least start to gain a – an initial bit of confidence and that could be the information. At the beginning, you know nothing, so everything sounds good and everything sounds terrible.
And so, educating yourself is clearly a step out of the gate. And it also – if you’re faced with having family members that think you – “Are you out of your mind to be doing this?” by demonstrating that you’re doing this in a good way, in a proven way, in a methodical way, thoughtful and you’re arming yourself with the right knowledge, that provides them with comfort as well.
Hanna: Very good. Now I understand the importance of knowing yourself, knowing what the steps are and that there are resources out there that, as you say, is very methodical. It’s step-by-step and you can – you can identify it and that can take you a really long way. But then you’ve identified one, maybe two, maybe three opportunities that fit the criteria and you narrow it down some more. But ultimately, you’re gonna have to negotiate a deal. So, when it comes to buying a profitable business, what negotiating levers do we have to getting that great price?
Richard: The great price is always gonna be a result of your understanding of the business and a deep dive into the business to be able to understand what are the problems in the business. In the seller’s mind, they’re selling – they’re giving you the opportunity of the lifetime, right? And they think that they’re – what a seller thinks their business is worth rarely has anything to do with the value.
So, the first thing I tell people, “Completely disregard the asking price.” That’s for the seller. That’s not for the buyer. That’s to make the seller happy or whatever the case may be for them to think about something. But it – you can’t let the asking price guide your valuation or negotiation. I’ve learned over the years there’s 50 individual fundamentals related to a business that can help determine the valuation.
The first part is math. Businesses are sold as a multiple of the profit and I don’t wanna get into the weeds related to some of the technical terms of EBITDA and adjusted EBITDA to keep these pretty simple. But basically, the profit of the business that a new owner is going to be able to have available to them, assuming all things remain status quo after a transaction. There’s a multiple attached to that and that’s the price that’s established for a business. Now, that could range from one to five times, sometimes more.
Richard: That’s a – that’s an enormous range. So, how do you get to a multiple? It’s the fundamentals of the business, meaning how long they’ve been in business. Is the business growing? Is it declining. How easy is it for competitors to enter the business? What opportunities do you have for growth? What licenses that you may need to operate the business? Is there any customer concentration? Are there any mitigating or potential issues that you can’t mitigate for, for example, customer concentration? What type of financing could you put in place?
For example, if you have two businesses and they’re both making $200,000.00 a year and they’re similar businesses where you look at them and you say, “Well, they’re probably priced around the same thing,” but what if one has been growing over the last three years and the other one has been declining? Even though they’re both at $200,000.00, the one that’s growing is worth more. Then there’s the terms and conditions that you have, and the condition of the inventory, and what the customer base looks like, and the supplier base.
So, there’s many different fundamentals that go in. The way we do it, we weigh each one of these critical components and there’s 50 of them, and attach a weight to them and then marry that to the profit and establish a multiple. And so, what people should also keep in mind is a few things.
If you do this right, it should prove to be the best financial investment you ever make. And so, you’ve got to be diligent about the valuation, but you can’t get nuts. Meaning if you overpay a little bit, it’s not the end of the world. If you buy a good business, the benefits that it delivers over the years far outweigh paying a premium. Conversely, a garbage business is never cheap enough and so you have this combination of science and art.
You have the math pieces, the numbers and fundamentals. That’s the scientific part. And then there’s the artistic part, which is what is it worth to you, the benefits that you’re going to get, the ability to have personal growth, to have no limit on your income, to improve the lives of others, to build value so that the time comes when you want to retire, you’re able to sell it as a multiple. So, it really is a very interesting balance between science and art.
Now, it’s darn near impossible to answer a valuation question with “It’s one plus two equals three.” It doesn’t work that way. There’s just so many factors that you have to weigh in to – what is this business look like? What is it now and what can it be with me as the owner?
Hanna: Well, I definitely see how there are like – it seems like a gazillion questions and factors.
Richard: [Laughter] At least maybe more.
Hanna: Right? And it just – it can have somebody’s head spinning and especially when they’ve invested time to identify their own needs, go through this step-by-step process where the weight and magnitude of this decision. Because next to buying a house, buying a business, unless it’s a very small business and it’s in its infancy, is probably the next biggest financial decision or investment somebody makes. So, what would be the two or three biggest things for people to keep their eye on the prize for?
Richard: Okay. So, the first thing I’ll tell you that related to house versus a business, the good news is the potential upside is much bigger from a business than it is from a house. The bad news is that I think you have your order reversed, meaning the biggest investment they ever make. Because with – if you happen to purchase real estate and you make an error, time typically heals all real estate errors, so as long as you can service the debt. If you buy the wrong business, it’s gonna go bankrupt in a year.
And so, in my mind, it’s a bigger decision than real estate and that’s why you have to do this in a good way. As far as the three – I just wanna make sure I understand your question properly. You’re saying the three biggest things that people have to keep in mind when going through this? I just wanna make sure I understood your question properly.
Hanna: Yeah, because it’s so easy to get lost in the weeds and…
Richard: Yeah.
Hanna: And talking about business being an even bigger financial investment, you just scared the pants off everybody, Richard. [Laughter]
Richard: Well, you know what? I guess my life is – I’ve proven it over and over again with tens of thousands of people that it’s doable and people have been ridiculously successful. But I come from a world of practicality and I don’t sell bullshit, pardon my French, to people. Like you see online some of these “buy these magnificent businesses making $250,000.00 for zero money down” and close the deal in three weeks. It’s complete nonsense.
And so, I want people to understand I breathe oxygen from this planet and I do this in a very practical way. So, I don’t wanna scare people, but I just want them to be realistic with them. This is very doable. I’ve done it 13 times, plus one co-investment. Like I said, there’s tens of thousands of clients that we’ve had over the years that have done this successfully. But people need to understand and it’s equally important that the information they get, they want practical, useful, real-world information.
And that’s why putting this sort of umbrella on a little bit of panic. I’m sorry to get you that way, but I’m actually happy that you said that.
Hanna: I appreciate what you’re saying and I appreciate that there are tons of people that have successfully purchased businesses, that have helped build a legacy for their family and have improved their lives and also the lives of their employees and the community in which they operate. So, there’s a lot to be commended for that. I grew up in a family business, so I understand the whole entrepreneurial spirit. But I also appreciate that for people that haven’t done it before and it’s…
Richard: Yes.
Hanna: It’s one thing to say, “Okay, I have a system and I’m gonna work the system, and I’m gonna have the right advisers and put the right pieces in place.” But there will still be times where their confidence may be lagging, where their anxiety levels are higher than others at critical points, especially in negotiations where they’re so close but yet so far from a signed deal.
Richard: Yes.
Hanna: And so, I’m wondering if you could give us a little insight on when you hit those kinds of lows in this process, ‘cause it’s a bit of a roller coaster, even though it’s a great ride and a great result.
Richard: Very much so, yeah.
Hanna: So, what do we need to keep our eye on? Where’s the horizon that we should be looking at so that [Laughter] we don’t lose our cookies in the process?
Richard: No, okay. So, it’s perfect because you’re keeping your eyes on the finish line, of course. At the same time, you wanna make sure that just because you’ve invested a ton of time into looking at a particular business, that alone is no reason to go through with the transaction. Sometimes the best deals are the ones you don’t do and you don’t wanna just say, “Keep moving ahead because I’ve spent so much time on this thing already.”
However, you’re going to go through peaks and valleys. You’re going to lose some deals. There’s going to be some sellers that are just impossible to deal with. That’s all part of the whole buffet of emotions. Now, we talked about earlier at the – I think at the onset that you wanna have a combination of excitement and being scared because it keeps you motivated and it forces you to do the right things. What I tell people and what’s really important, you’re going to have the peaks and valleys.
There’s times that you’re gonna have some disappointment. There’s times that you’re gonna be saying, “I’m not sure if this is the right thing.” And that’s all okay because it’s all normal and common. And so, you just have to move through the process to push through. That’s the key because it’s – I’ve been doing this for three decades.
Richard: I learned something new in every single deal and there’s still times during a deal that you’re just shaking your head or saying like, “It’s just tearing my guts out, causing me all kinds of heartburn.” I go through that emotion as well and this is what I do for a living. And so, what I tell people, as far as the confidence, understanding that confidence is going to wane at times, it’s normal because there is uncertainty that’s gonna come in.
And so, the only way to overcome that is through diligence and it’s the only way, is to really investigate any of the issues, any concerns, any potential problems. You have to do a flawless job and be through at every step because getting through the step is critical. If you don’t do the work in a detailed, thoughtful way, that confidence is gonna drop like a bag of – I always say – I play hockey, so I say, “A bag – a 50-pound bag of hockey pucks.” Because your lack of comfort with the information is generally what causes people’s confidence to decline.
And the only way to combat that is having the knowledge to be able to push through that particular stage of the process. But again, it’s gonna happen.
Richard: It’s inevitable. Hanna. So, I wish I could tell you a silver bullet or a magic pill. It happens to everybody. So, you just have to keep pushing through because it’s going to come back once you feel confident, “Okay, I’ve addressed that issue” or “I’ve addressed that issue and there’s no resolution for it, and it means that I can’t buy this particular business.” So, if you go down the laundry list of what’s important, we’ve talked about the right business, number one.
Number two, have – acquiring the knowledge you need to navigate your way through each of the different steps. And a third point that people need to be made aware of, there’s no such thing as a perfect business. Every business is gonna have warts and blemishes. And so, understanding that it’s not gonna be perfect. If you’re searching for the perfect business, you’re never going to find it.
So, you try to deal with – there’s going to be incidents that come up and you don’t deal with them as catastrophes. There’s gonna be catastrophes that come up and don’t treat them as incidents. But do your logical diligence at every single step and understand that emotions weigh into it heavily. Confidence will wane at some point. Confidence will increase at some point. That’s just part of the process.
Hanna: Even identifying that it’s part of the process I think is very valuable, Richard. So, I appreciate your sharing that and especially given all your decades of experience in this field, that you yourself still encounter it and discover new things in new deals. Like you said, that it’s not perfect and so it’s okay to feel that and that doesn’t mean there’s a fatal flaw in the process. Just working through it and being satisfied and knowing our own risk tolerance can go a long way.
Richard: Yes, but…
Hanna: You have covered a tremendous amount and I thank you. It’s really been terrific. I appreciate your time and the valuable tips you shared about buying a profitable business at a great price, and especially that a great price is not a magic number, but it’s a number that’s arrived at by looking at a number of factors and what the importance of those factors are to us. So, thank you.
And if you’re listening and you’d like to know more about Richard Parker and his program, How to Buy a Good Business at a Great Price, that information, as well as a transcript of this interview, can all be found in the show notes at BusinessConfidentialRadio.com.
Thank you so much for listening. Please be sure to tell your friends about the show and leave a positive review. We’ll be back next week with another information-packed episode of Business Confidential Now. Until then, have a great day and an even better tomorrow.
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