Smart Business Strategies: Buying vs. Starting with David C. Barnett

Should you buy an existing business or start from scratch? 🤔 In this episode of the Franchise Freedom Podcast, Giuseppe Grammatico welcomes back business expert David C. Barnett to discuss the pros and cons of each approach. David, author of the new book "Buying vs. Starting a Small Business," shares invaluable insights to help you make the right decision. Learn how to avoid costly mistakes, evaluate business opportunities, and build a solid foundation for entrepreneurial success.

➡️ Connect with David C. Barnett: www.DavidCBarnett.com

➡️ Get David's new book: Link to Amazon listing for "Buying vs. Starting a Small Business"

➡️ Explore franchise opportunities with Giuseppe: https://ggthefranchiseguide.com/right-fit/

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The Franchise Freedom: Discover Your New Path to Freedom Through Franchise Ownership, Book by Giuseppe Grammatico https://ggthefranchiseguide.com/book or purchase directly on Amazon.

Transcript

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you can Accept just as much risk doing a business acquisition as doing a startup if you don't buy the business the correct way people need to very critically look at what they're watching and they need to ask themselves, am I overindulging in what? Harvard business review has termed success porn. The reality of the world of small business is that the meat is in the ownership Right if you own it and it's profitable and doing well, that's where you profit the exit usually comes because somebody has something happen in their own life that prevents them from continuing to operate it any further Welcome to the Franchise Freedom Podcast, where you can escape the corporate trap through franchise ownership. Here's your host, Giuseppe Grammatico, The Franchise Guide. Welcome to the Franchise Freedom Podcast. I'm your host, Giuseppe Grammatico, your franchise guide. I have a very exciting episode. This is David C. Barnett's, I believe, fourth time f five published episode. This will be our fourth guest appearance on the show. David, welcome to the Franchise Freedom Podcast. I'm excited, Guseppe, because I heard somewhere that if I appear five times, I get a franchise fear freedom jacket. So I'm looking forward to that where I'm 80 percent of the way there. Here we go. I'm looking forward to this. I got to work. It's like the the Saturday night live jackets that they've been giving out. So that's, I like that. I gotta, I gotta, we'll figure out maybe I have a robe. I think we got, we can give away. So, that's a great idea. I like, I like that idea. So people have heard you on this show. You're, you're my go to for. Business strategy exit strategies. One of our most popular episodes, give the the audience that maybe just a little bit of a background and we're going to dive in because that's my exciting news. Yeah. So, I'm a former business broker, a lifelong entrepreneur. I've started businesses, I've bought businesses, I've sold them, I've closed them. So I've also seen the downside of where you can end up in a dark spot sometimes in the world of entrepreneurship. Back in 2000, at the end of 2008, I got into the world of business brokerage and I was a business broker until the end of 2011. I left my brokerage. I got out of that industry just because of the up and down cashflow. And, you know, that was the period of time with the great financial crisis as well. And, you know, I went through some personal stuff. I got a divorce at the time. I ended up working as a banker. And while I was at the bank, people kept calling me looking for help with their small business deals. And so I got brought back into this world when the bank reorganized. I got a, a package, you know, to, to leave the organization. And I use that money to kickstart a consulting business. And along with the consulting business, I did some marketing moves, like I wrote some books. I started a YouTube channel. And so now those online things and the books that I've written help to introduce me to people from around the world that I work with. And so I work with people who want to buy a business or sell a business as a consultant now. And so I help take them through the process and much like an attorney or an accountant, As I do different projects for my clients, I build them along the way. And so I'm not, you know, charging commissions like a business broker might, but I've, I've helped hundreds of people do deals. More importantly, I've helped probably well over a thousand people not do a deal, which was a crappy deal. There's a lot of bad deals out there and. You know, someone with a lot of experience who's seen a lot of stuff can usually be a shortcut to understanding if something is hazardous or not. Yeah, I like that. You know, that's that, and that's the thing. Part of the value you bring to the table is what's a good deal and what's not. And, and, and if it's not so good deal, what would make it a good deal? And that's, that's, that's part of the the nature of the business. When people ask like, what's your success rate, it's like, well, if I'm helping people, the, the success rate is high, right? It's, you know, it's up to you to, to make that final decision. I think that's that's great. You're, you know, you know, exit the exit strategies. One of the most popular downloaded You know, we, we joke about it, but when I bought my first franchise, I asked, how do, how do I sell this this business down the road? And the franchisor took a step back and said, well, what the heck, you know, am I, am I regretting this decision of, of approving you? But, you know, people want to know that, you know, there's a lot, there's a lot to build in and. With the, an exit strategy, you really have to kind of, you know, factor in what's, what's the timeframe, what, what should you be doing? Because that timeframe does absolutely change things. So with that being said, big, big announcement, new, new book. Tell us I think it's number eight, tell us, tell us the title there and what the book is about. Cause that's going to be the theme of the show. It's buying versus starting a small business. And so it just, it's brand new, just came out Labor Day. And the reason why I wrote this book, all the other books I've written have been about selling a business or buying a business. I have. I have been involved in starting many businesses and I've given advice and guidance to many people that were growing a business or, or looking at doing a startup. But I always kind of avoided the space because there's so many other people online talking about starting businesses. And one of the things that I've noticed you know, I've always been a big proponent of people buying an existing business because you've got an established cashflow there. But here's the issue is that People are drawn towards these established businesses because they feel like it's a no brainer and it's going to be an instant guarantee of success because the previous owner was successful and can demonstrate a certain cash flow. And that success doesn't always transfer to the new owner. And the second thing is that you can Accept just as much risk doing a business acquisition as doing a startup if you don't buy the business the correct way And so one of the biggest problems that we see Is that the price people pay for a business is way too high for the cash flow that they're going to get Or the deal's structure is not correct. So You know, maybe they'll get a loan from a bank and that might be over 10 years But maybe there's some seller financing and maybe the seller financing is too aggressive Maybe the seller wants their money paid out in two or three years and they put themselves into this cash flow pinch sometimes without even accurately understanding what their numbers are going to look like and You know before the call you you brought up the the whole idea of Cash flow from a business broker's point of view. The common term for this is seller's discretionary earnings A lot of people who come into the world of buying a business don't really know what that means It's a great definition The definition is the cash flow available to an owner operator that works full time in the business and it's a derivative of EBITDA, which means that depreciation income taxes interest these have all been added back and so someone might believe You That a business with a cash flow of two hundred thousand dollars means if I buy this business I get two hundred thousand dollars But that's not what it means What it means is that the owner will have two hundred thousand dollars available if the performance continues the way it has been to then pay A salary for themselves the debt service to the bank pay for any capital equipment replacement because depreciation is how accountants Account for things wearing out we've added it back Which means you now need a budget out of your cash flow to replace things like trucks and equipment machinery, etc and taxes Right. And so no, the 200, 000 doesn't go in your pocket. You're going to draw some kind of salary over there and you've got to make sure that you've got enough money to cover everything else. And people who don't do the math correctly can end up in a position where there's no money left for them. And so one of the things that I bring up in the book, buying versus starting a small business, is that I believe that whether you are inclined to buy a business, or you're thinking about starting a business, There are advantages to considering the other strategy in your plan to get into business. And so, for example, I'll often say, I'll, I'll say to someone who wants to buy a business before you pull the trigger on this deal, let's really take a close look at what it might cost to reproduce this. Right. And so in the case of an overpriced business, for example you know, I, I had a conversation with someone just a little while ago, the example is actually in the book. Where they were looking at buying a lawn maintenance company that had a little over a hundred residential accounts and maybe a dozen or so commercial accounts and produced a certain cash flow for the owner. And there's a lot of talk out there about what businesses are worth. And so they've applied a multiple to the cash flow and they said, this is what we want for the business. And so the buyer initially thought it seemed reasonable. The business broker thought it seemed reasonable. But when I was talking with this guy, I said, you know, If you just hired two people to do the lawn maintenance, and then you hired a salesperson, do you think within a year and a half you could get over a hundred accounts? And what would that cost you? And it was a, it was a sum that was much lower than what they were looking for to sell the business. And, and it really gives someone, you know, pause for thought, like, does it really make sense to do this deal for what I'm acquiring, right? Some businesses have irreplaceable sort of characteristics. You know, if, if you are the, the you know, only gas station at Walt Disney world, you know, maybe you, you can charge more for gasoline or you have some kind of crazy advantage because of your location. But for a lot of businesses out there, You know, they compete with all other kinds of companies. There's regular competitive pressures. And if you're going to take the risk of getting into business, whether it's a startup or an acquisition, you have to be fairly compensated for the risks that you're taking. You got to get a return on your money, but you got to get a return on your time. And I've just seen too many people get into deals where they've overpaid for a business. And so, you know, while the startup doesn't come with the customers you can often get into it for quite a bit less money. I like that and it's very well said and I'm definitely using this show as a reference point because that's the key right there. It's like, you know, what is that cash flow? What is the appropriate multiple? I know when I sold my business, how involved are you in the business? Some people, you have two buyers. You have someone that's buying it as an investment and someone that's Buying it. And he's going to be, he or she is going to be in that business full time. So if they're an investor, they're going to say, well, if the owner myself was in the business 40 hours, they're going to have to replicate me. They're going to have to find someone else. And in, in, in my case, they wanted to back that amount out and say, well, I need to take, we'll throw a number a hundred thousand dollars out of the cashflow because I have to find a manager to replace you, let's look at kind of what's left leftover. But the key, the key thing I'm, I'm seeing, cause I do work with business brokers. As well, across the country is the idea of forgetting to factor in debt, the debt service, right? It's like, okay, maybe the, the owner doesn't have debt, but you will have debt as you incur and buy this business. You know, what is that SBA loan payment per month that you have to That will significantly reduce the cashflow depending on what it is. So that's there's these key key areas But you you where I think you nailed it is when looking at a business you have to you have to look at a differentiator What what's What's differentiating that business as to your point. And I was lucky enough to get an early copy of the book, but like with the lawn care business, if I were to replicate this myself, yes, it may take a year, but look at the premium that you're paying for this, for this resale. It may be three times, you know, SDE, solid discretionary earnings versus doing it on your own. And there's no guarantee to either one, right. That the one business will continue the cashflow and that you'll build the business. To that point. But that is a huge, huge thing that I think. People need to consider with any resale. Now, you know, the, the big risk that I often point out to when it comes to starting a business from scratch is that you then have to figure out how to actually execute, like you, as a, as a business owner, you have to figure out how do we actually serve the customers, make the product or whatever it is that you're doing. And, and so there's risk in that, that, that you don't face with buying a business because you've already got those systems in place. But. You know, like you talk about franchises on this program all the time and that's part of what the franchise tries to do, right? They try to simplify the startup by by providing the how Uh of of whatever the product or service is right? So it just highlights that there's other ways around some of the problems whichever pathway someone decides to go Yes. And, and by the way, and there's, there's risk with the franchise, you know, you wrote a book, it was funny. We were introduced our first episode, Frank franchise warnings. And I go, who the heck did, did I get on the show over here? And we were saying, I got one of those here. There you go. The, you know, you got, you got eight books. I think we're going to have to, we're going to have to get them all on there, but we're going to, we're going to link them to the show notes, but franchise warnings, when you look at the title, like, oh my gosh, who did I have on the show? What are we getting into? But we're seeing the exact same thing. These are some warning signs. There's 4, 000, just say we'll just round the number of franchise companies, but not all models are built the same, not all models have, you know, their, their systems are not necessarily all equal. Right. Many, many of them will excel in certain areas and you still have to. Do your due diligence and, and, you know, factor in what the franchise or it's done in the past and things like that. So, very well said franchise could be a good option, but you still have to go through the due diligence and speak with the, your fellow potential franchisees. Yeah, and another big thing that I try to get across in the book is just showing people examples of how to change their thinking around the business model or idea that they come up with and I use a couple of basic examples, but But what I find when I when I speak to people who are new to the world of entrepreneurship Is that they will get an idea like I want to open you know this kind of business and what they see is they see a business like the one they might want to have and they see You know Maybe that there's a big investment, you know, their equipment, machinery, a location that needs to be built out, all this kind of thing. And maybe it's going to cost a million dollars to build. And so what I do in the book is I show people different ways to re imagine a business and how can we achieve the same things while reducing the risk or reducing the investment, trying to become more resourceful in how we put things together. Because. As you move through the world of, you know, building a business, the whole idea is to keep testing the market to make sure that you're not fooling yourself, right? And so, you know, a classic example is someone might, might say, Oh, I'm thinking about introducing this new product that I want to make. And one of the things that I will suggest to people is well Can you find a supplier for that product right now? And just go out and make sales of their product And see if there really is a market for the product and figure out what people are willing to pay and what their expectations are Before you invest in everything you need to actually make the product right right? Because you could discover that you're wrong You could discover the that there isn't really a market or that people are very price sensitive They're not willing to pay what you think they should pay That they're willing to pay you could come up with all kinds of new information Once you actually get into the market and start talking to people And if you are just reselling someone else's product well, then you've avoided a whole swath of investment that you might normally have made and and You know people become very Into an echo chamber, you know, like, like if you think it's a good idea and you share it with other people who like you and love you, and they're going to be maybe encouraging you saying, yeah, that is a great idea. Who wouldn't want that? Or if you like, let's say you're involved in a certain kind of sport, if you really like football and you say to your buddies who are also into football, I want to start this football themed business. They're all going to think it's a great idea, but. Are there really enough people in the public who are going to go out of their way to, you know, patronize a football themed business that they're going to think it's that great that you're, they're going to pay the price you need, et cetera, to make it work. And this is where you need to kind of test these ideas. And, and so I try to get people to learn how to re imagine the way they organize their thoughts about the business to be constantly testing before they risk the big money. And, and there are ways to get into business with relatively no risk. And as you establish, you know, that there really is a demand or need in the marketplace, you can then, then make decisions to build things out. And it's interesting, you know, when you've already proven a market, if you, you know, in the case I gave of the selling someone else's product, if you then went into a bank and said, look, I'm already selling a million dollars worth and I'm buying from a wholesaler, But I can make more money if you give me the money for this machinery to make my own. But that's really easy for a banker to agree to. Because they already know that you've got the sales, right? That's a, that's a very good point because that's another, another factor is how am I going to get, how am I going to get funding? You need, you need to make, you know, the, the you got to put that business plan together. You have to sell it to the, to the funding companies, to the SBA, to whoever, wherever you're getting the the monies from. So that's, that's, that's a very good point. A lot of, a lot of people listening in it's their corporate executives they don't like their job. They're unhappy. They're, they're looking for what's next. They're looking at resales, whether it be a franchise or non franchise or looking at franchise, they're looking for that next step. You know, what are some piece of advice maybe that you wish you had going to go away back when, but that you would give to someone that, that's in that phase, like where, What I'm seeing is the, you know, the internet, there's a ton of information, tons of shows and podcasts don't know where to start. And it seems to get to be information overload. So what do you, what do you recommend to someone looking that that's making the leap? They're looking to make a leap. I think that people need to very critically look at what they're watching and they need to ask themselves, am I overindulging in what? Harvard business review has termed success porn. So you, you, you can tune in to all kinds of stuff all the time. That is showing you how successful, profitable, and well off everyone is that gets into business. And the reality is, is that a lot of those people have something to sell you. And the reality of the world of small businesses, this failure rate is incredibly high. And then there's also on top of the failure rate. There's what I call the the the purgatory Right, so you can not fail and not be successful at the same time, right? So, you know, there's an awful lot of businesses out there where the owners do not take home a rate of pay commensurate with their skills They don't even take home a rate of pay that they would earn if they worked In that industry for somebody else that had to pay a fair market wage to get them to come and work Right and but those businesses are still open i've often had people will point me towards sba default rates and they'll say oh small businesses aren't risky Look at the low default rates of the sba, right and i'll say to people, you know Like that's got nothing to do with the success of small businesses You could be a small business owner with an sba loan Whose spouse has a great income and you might be working for free in your business You And you're still paying that SBA loan because you don't want to have it, you know, a default impact your credit score because you've personally guaranteed it. And maybe they have a lien on your house too. Right. So to me. That's not a loan default, but it's certainly not a success story because the person's going to work every day Just to make payments on the loan. So be careful what you're consuming You can really again. This is these are internet echo chambers The the magical algorithms behind all social media They are looking at what you are consuming so they can feed you more of it, right? And so this is why one person's instagram feed is all about You People getting rich with business and another person's Instagram feed is all about model railroad trains and, you know, trips on historic railroads. It's like, it just, it feeds you what it thinks you want to see. And it can be very, it can become really easy to believe that everybody else in the world is watching the same stuff you are, and they're not. So look at what you're consuming. And ask yourself, is this having an impact on the way I'm thinking? Am I realistically looking at what's going on? And one of the great ways to test yourself Giuseppe is pick an industry that you might be interested in. And if you can get access to the RMA risk management associates data or industry Canada up in Canada, they offer this for free online where you can actually search industries and you can look at the aggregate tax return data for all the companies in that industry and it will divide them up into quartiles. And you can really see. How businesses in that industry actually perform, like what their sales are, what their costs are, what their overhead, what their net income is. And you can really see the reality of these industries. And what you'll see is that in almost every business you can imagine, the business is hard. Like there's a lot of businesses that struggle to make money. There's a lot of owners that struggle through ups and downs. It, it, it's not easy. And so this is why we hear those statistics about the high failure rates. And. This is why I think you need to build a solid foundation of understanding an industry, understanding a business, and then try to maneuver your, you know, your game pieces in such a way that you reduce the risk as much as possible. And that might mean. Buying an existing franchise location. So you already know what the performance is and you've got the help of a franchise or that might be a strategy for some people for other people might just be buying an existing business. If they can negotiate a price, that makes sense. And for other people, if these opportunities just aren't there or don't make sense, then maybe they should look at a startup, but maybe they can reformat their business in different ways to help them do it in a, in a less risky way. I like that. That's, that's my aspiration for people out there is the mission of my business is to help people avoid bad deals. And that's why I put out the, the enormous amount of educational content that I do. Be just cause I want to, I want to be informative and I want to help people learn. And there's so much, right? There's so much to consider, so many moving parts. And that's why I like your approach. It's. You know, more coaching style. I remember you know, way back when I had sent over, I'd refer someone over to you that wanted to sell their business and you shocked that person and said, well, why do you want to sell that business? And he, he was ready to say, well, right. You know, David, are you sending me the contracts? What can we get for it? And you help that individual, I'm not going to name names, but on a 30 minute call or 30 or 60 minute call, he went from being full time in the business to being, you know, well, I would say a semi absentee as possible from eight hour days to maybe an hour or two. And he ended up keeping that business re recently sold it, you know, very recently, but it was very interesting that the approach was like, I'm selling this, but why? And if there's a key aspect that you don't like about the business. Let's change it up and you know, let's let's let's fix what's there because this is a cash cow. Yeah. Yeah you know the the meat or the juice in Businesses is not in the sale. They sell for relatively low multiples of cash flow It's not like what you see in the headlines out of silicon valley with these, you know tech startup type zuckerberg sells the shares for huge amounts of money The reality of the world of small business is that the meat is in the ownership Right if you own it and it's profitable and doing well, that's where you profit the exit usually comes because somebody has something happen in their own life that prevents them from continuing to operate it any further So if you've got a great business and it's throwing off a lot of cash and you're not happy with the business Maybe you could make a change as you suggested usually if you decide to get out, it's because you realize, Hey, I just, I cannot do this anymore. And I'm not willing or unable to make some kind of change. And so I've got to get out. And, and the minute you decide that you've got to get out of a business, you need to act because otherwise your own attitude will start to impact employees. That attitude will infect customers and the business performance will decline. The, the minute the owner is disengaged, everyone starts to feel it. And you've probably been in a business and you can tell the owner's disengaged. You know, like things aren't clean, things aren't maintained, things are breaking. Like it, you know, it doesn't feel good to be in a business where the owner is not engaged. And it's, it's, you know, we pick up on that as people. Absolutely. Yeah. And, and it, and it affects that valuation, you know, for, you know, you think you may be helping the business and, and you're harming it, you're. You know, you're affecting other people's livelihoods, people working there. So now very, very well said. We covered a lot and your resources, I think are some of the best where, where can if people want to get ahold of you or, or learn a little bit more about the resources and the services you offer, what's the best place that they can reach you? DavidCBarnett. com will bring you right to my blog site. There's a tab there called books where you can find my books, the latest book. You can find out, you can buy it on Amazon or buy it in a PDF right from my website. And then there's blog posts there with recent videos, etc. I'll lead you right over to YouTube if you just want to subscribe on YouTube. All my YouTube videos get fed into an audio podcast stream. So if you prefer to listen in the car, you can do that too. It's a, it's easy to find me if you just type David Barnett, small business into almost anything I should come right up. Awesome. David, it's, it's been a pleasure. We'll work on our fifth episode, get you that code or that robe that I promise you. And look at definitely looking forward to, to our next conversation. Thanks again. Awesome. Giuseppe, thank you so much. Have a great day. Thanks for tuning in. If you want to learn how to make the transition from corporate to owning your franchise, join Giuseppe on the next episode. You can also follow on all social media platforms and achieve financial and time freedom today.