When you involve advisors, brokers, or lawyers in your deals, it is like asking a barber if you need a haircut. Of course, they are going to say yes, they are making a profit from your using their service.
Unfortunately, reliable information about how to buy and sell companies is limited. The available books tend to be written by Master of Business Administration (MBA) professors, advisers, lawyers, accountants, corporate finance people, or business brokers—enterprises that make money by helping people buy or sell companies. This is why I started the Harbour Club so that I could help people learn to buy and sell businesses on their own. At the Harbour Club, I share with my delegates practical tips and advice from my personal experience using relevant examples, which have been implemented and proven for more than twenty years.
Avoid Advisors, Brokers, and Lawyers
The books written by advisers and brokers are inherently flawed. Advisers always say, “Surround yourself with advisers.” Obviously, they’re going to say that! You can spend a fortune on advisers. Most corporate finance companies and legal firms will require a down payment or monthly retainers to engage them, sometimes running to tens of thousands of dollars. People who are taking fees on an ongoing basis until you’ve done a deal are actually incentivized not to do the deal. At best, they’re incentivized to drag it out for as long as possible.
Business brokers can be on the buy-side or the sell-side of a transaction. They’re traditionally incentivized because they receive a percentage of what you pay for the business. There’s not much impetus for them to try and support a ‘no-money-down’ transaction—where’s the money in that deal for them? They might suggest the leveraged buy-out (LBO) model, which is, of course, one way to buy a business. There’s no shortage of information on how to do an LBO. On Amazon, there are currently over 280 books on how to buy a business with no money down by using lots of debt.
It takes two people to do a deal. Ultimately, it’s a face-to-face thing. It’s about trust and rapport, and the more people you involve in that discussion, the less likely it is that the deal will happen. The deal team that the brokers advise you to use creates a problem as they often interfere in the relationship you’re trying to create.
Brokers and advisers subordinate the best advice by saying, “Get the best lawyer, or the best accountant, or the best corporate finance company you can afford.” Rather than standing by their advice, they just tell you to pay for more advisors. It is a lazy technique that does not reflect how the real world works (or can work), and it’s not particularly helpful if you’re running a small to mid-size enterprise (SME) and you want to acquire one of your competitors. You could easily spend more on legal fees than you spend on acquiring the company.
Deals Are Everywhere—Tune in to “DEAL-FM” or Look for the Signs
To find deals, you have to position yourself to be looking for deals in the first place. You have to think about where the deals are. It’s tempting to google “businesses for sale,” but all that will do is drag you down a rabbit hole to a bunch of brokers’ websites or business-for-sale websites.
When you contact brokers, they have their own ideas concerning the deal structure and expected amounts of money. Tackling this mindset and getting them to change their minds can be both toxic and challenging. Brokers often manipulate the profit figures and then give the seller the idea that they can get huge multiples of the profit. Quite often, that’s because the broker is charging an upfront fee. Their business is less about selling companies and more about signing up sellers to get these upfront fees.
Property experts don’t spend their days staring into real estate agents’ windows. You should not be looking for bankruptcy attorneys, business-for-sale websites, or business brokers. If you are looking to acquire a business, don’t look for businesses for sale. The reasons are many, but here are a few:
- You are probably dealing with a broker: Not always, but with many businesses that are actively selling, you end up dealing with a broker. The broker can’t make a decision. Their primary interest is in getting the highest price because they receive a percentage of the deal in addition to their upfront fee. You want to deal directly with the principals to build rapport. This makes it possible for you to understand their motivations and needs. This understanding makes it possible for you to present a deal structure that solves their issues and gets you a deal: the win-win scenario.
- You can get into a competitive bid situation: Here, you are being played against another buyer (real or imaginary). The fact that the owners are actively selling can create colossal time traps, whereby you invest weeks or even months of your time only to find out they had a cash buyer all along and just wanted you as a stalking horse.
- High expectations: The seller’s better half is down at the Mercedes showroom, picking out the leather colors. Try and talk them down from that one.
- Mentally checked-out: Businesses frequently decline in the year after they are put up for sale because the owner has mentally checked out. Businesses take nine to eighteen months to sell the conventional way (just the physical process), even when you have a buyer ready. Deal fatigue can set in, affecting the business. This then means that the buyer wants a better price for the now smaller business at the last minute.
- Who will run it? Don’t buy a job. A business for sale often means the manager who has been running it for years (often massively underpaid) is leaving, and you will need to jump into their shoes—which means you end up with a full-time job. What’s more, if you do a leveraged buy-out (LBO) and borrow money to do the deal, you not only have a full-time job, but all the money from that job goes to the bank for the next five or seven years, assuming the business stays the same or grows. If it shrinks, the bank takes your house. Joy!
6. Manipulated accounts (optimized, if I’m being generous): When businesses are being sold, it’s incredible how good the prior financial year—just before they sell—is compared to the previous eighteen! And, of course, next year will be the best ever. It is also common (especially if there is a broker) to add back expenses to inflate the profits and then multiply the profits. For instance, they might say they are selling at five or six times earnings, but they have added back their salary, the interest charges from the bank, the coffee machine, half the phone bill and anything else they can find that they wish they hadn’t bought (but did). The premise being that you won’t incur these costs, so these are the true underlying profit. Well, you can’t blame them for trying! Any savings you can make are your upside. If they wish they had run the business differently, well then, they should have run the thing differently!
7. Reading too much TechCrunch: You always get the people who decide they want to sell something and create this “amazing” brand/culture/ product—so amazing that it generates sales of $100,000 a year and is somehow worth gazillions of dollars. A little naivety and reading too much TechCrunch are all that is needed to massively inflate the ego and price tag of an ordinary business. Find a seasoned entrepreneur who’s had a few more trips around the block in their career.
8. Bankruptcy Attorneys: Too late—it’s like a doctor looking for patients in a graveyard. If you are looking for a distressed deal, you want the guy who’s thinking of calling the bankruptcy attorney because it’s dead after they do. Most likely, everyone has lost their jobs, creditors won’t get paid, and clients will be left high and dry. If you can get in before all this happens, you can rescue it. Of course, insolvency may form part of a broader strategy, but it’s not a source of deals. It’s a tool, not a market.
Following my formula, you can buy a business on your own without interference from advisors, brokers, and lawyers that just want to cash in on your hard work. Learning how to do deals does take time, but when you follow the strategies I’ve been outlining here in this blog series and what we teach at the Harbour Club, you learn a lot, you earn a lot, and you gain a lot!
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