David Barnett - The Truth About Buying or Selling a Business: What Every Entrepreneur Should Know

In 3, 2, 1.

Welcome back to Becoming Preferred, the podcast for ambitious entrepreneurs and business professionals who want to level up their game and become the best version of you.

Every week we talk about how to become preferred.

But let me ask you a tough question.

You might be building a brand that customers love, but are you building a business that an investor would actually buy?

Whether you're an established entrepreneur looking for an exit strategy, an investor looking for high yield cash flow, or a professional wanting to skip the startup phase and buy an existing company, today's episode is your ultimate playbook.

Joining us is David C. Barnett, an international private transaction consultant, three time best selling author and the master strategist behind 11 books on business acquisitions, financing and valuation.

Today we are pulling back the curtain on how businesses are actually bought, sold and valued in the real world.

Join me now for my conversation with David Barnet.

Well, hey David, welcome to the program.

We're delighted to have you.

Michael, thanks for inviting me.

It's great to be here today.

Hey.

Well, I'm excited about our topic.

You got lots of good things that we're going to be able to talk about and you've been around for quite a while doing what you do and.

I think a lot of our listeners.

Are going to benefit from some of your insights.

We're going to be talking about businesses buying businesses, building businesses, selling businesses, what's hot today, what's not.

Maybe they might be looking at franchises, opportunities, the whole gambit.

So we're going to chat all about it.

What makes a successful business in 2026?

But where are we speaking to you from, David?

Where yet?

Today I'm in Moncton, New Brunswick.

So this is, this is my home turf here on the east coast near the Bay of Fundy.

And finally it's starting to be warm here, which is always nice.

I hear you.

I'm in the Calgary studio and we're just, we've been raining for a month and so I get it.

And I've been to Moncton and beautiful people haven't been to New Brunswick.

Awesome place.

People are amazing.

And just north of Maine there and you can get in cross that border pretty easily and particularly if you're chasing some lobster up the coast.

So.

Good spot.

Yep, absolutely.

Okay, well, let's go back to high school for a minute.

I always like to go backwards.

You're back in school, you're deciding which, I don't know, if you were a jock or into sports, deciding what you wanted to be when you grow up.

How did you get on this path?

Yeah.

So I always knew that I had an affinity for business when I used to watch that old TV show Family Ties when I was maybe in middle school.

My favorite character was Alex P. Keaton, if you remember him.

Right, Fox.

Yeah, yeah, that's right.

And so I got into sales.

Do you remember those Dicky D ice cream bikes?

The three wheelers with.

I.

So when I was 14 years old, I did that for the summer and I was selling on average like 400 a day worth of ice cream on the route that I developed.

I was earning myself like 80, $90 a day cash.

And that was it.

I was, I was hooked.

You know, people would come over and I would upsell them to the drumstick, which was at the time like 225 or something.

You away from the little fudge bar.

That was 80 cents.

And.

And I did well with it.

And it gave me that taste for business.

And I would always walk into these businesses and just see something that was inefficient and it would irritate me.

I would be like, why aren't they doing it this way?

Why aren't they doing it that way?

Like, it seems very obvious to me.

And I didn't understand why they didn't see what I saw.

I love that.

I totally get that 100%.

I always say there, I see a new way to make a million dollars every week.

And if it's not every week, it's every two weeks.

And because there's.

You just look for those opportunities.

How do I disrupt this?

And it's a thinking, it's a mindset.

And we're not taught that.

We aren't taught that in school.

You didn't learn that in school.

You learn that because were you raised with an entrepreneurial family or both parents working?

You know, this is, this is incredible.

Okay, Michael.

Because I was raised by an electrical engineer and a stay at home mom, but I was adopted.

And when I was in my early 20s, I managed to connect with my biological father's side.

And when I met he had been a gas station franchisee, he had owned a cabinetry business, he had owned a house contracting business.

Like the guy had owned four different businesses and his father had owned three different businesses.

And I was just like, huh, puts a new spin on nature versus nurture, you know, like, totally.

I think, I think it mattered.

My parents were immigrants from England and they both came over, landed with the nickel.

They both had jobs, but I always knew them to have two jobs.

My dad was with the service air force years, but he had a Second job as a musician and playing gigs every night.

My mom worked at the bank and then sold cosmetics on the site.

Kind of like the old before the Mary Kay thing.

Yeah, but before that even.

And so I always saw them working, always working, and we always had everything we needed.

But it was entrepreneurial time.

And I remember just watching and watching them talk to people and how they talk to people.

I always ask people, did you have a paper route?

So when I talked to entrepreneurs, did you ever have a paper out?

And a lot of successful entrepreneurs, some of you wonder what's the newspaper?

Listening to the show.

But in those days we had paper routes.

And I remember I lived in Toronto at the time and I was 10 years old and I wanted a paper, but you had to be 12.

And so I went to the 12 year old kid who had the paper routes of the apartment buildings we lived in and I said, look, let me deliver them.

You just go and do the collection.

So we used to have to go and collect money once a week, $3 a week or whatever it was, they would go do that because I wasn't old enough, I delivered the papers.

Well, once I turned 4 or 12, I got the paper, they had to be gone at 14.

So I'd go get other buildings and then I would Simply hire other 10 year olds and pay them half the money.

And I just handled the collection.

So I Learned that literally 10 and 11 and 12 years old, you were subconscious.

I was subcontracting and I learned the power of that.

But once you get that bug, you start to see it.

And so you see all the time.

All right, so you're in school, you decided business was it, you connected with your dad and good for you, congratulations, hopefully still got a good relationship.

You have been able to form that connection.

Yeah, yeah, I talked to him occasionally.

And what was great about that is I met a bunch of half siblings that I never knew existed.

It was kind of cool, we made a lot of family connections there.

But when I went to university it was to study business.

And I believed, kind of erroneously, that I thought they were going to turn me into a businessman by going to get a business degree.

But that's really not what they do there.

By about third year, I realized that they were trying to change me into this like what I now call a Fortune 500 bureaucrat, which is some kind of middle manager in a big company.

And all the businesses I wanted to work with were the ones that you see when you're driving through a community.

The small businesses, the mom and Pop shops, the sort of the small manufacturer with two dozen employees, that kind of thing.

And the real learning curve for me was after I finished my university program, I became a sales rep for the Yellow Pages.

And so I got to go and sit down with all of those people that I was just talking about, right?

The owners and managers of all the small local businesses.

And I got to ask them, how do you make money?

The next time the phone rings, who would you like it to be?

Who would you like to walk through the door of the shop next time, right?

And so I got to learn about all of their business models, what their margins were like, how many sales they would have to make in order to pay off the investment in the ad that they were going to buy from me.

And so that, again, I call that my small business mba.

And I was with the Yellow Pages for about seven years.

It was fantastic.

Oh, I remember.

That's how I started my career.

I meant, well, I want to come to that.

But going back to university, same story.

But you're being taught by someone who's never left university and never done it.

And so learning it.

I remember I opened up my first office.

I got everything else done, and I was.

It was nervous, and I got the Yellow Pages, and I just waited for the phone to ring.

Nothing.

I opened up the Yellow Pages, started making calls and set up some meetings, and from there, I never looked back.

It was about being proactive.

How do you address, though?

There are people who, you know, it's like I say, if you want to be a speaker, people say, well, I thought I said, if you can look at speakers and you do that, what I do, we're in the same profession, and go, hey, I could do that.

Maybe not that way, maybe with my own style, but I could do that.

I was telling me how you could.

So I think it's the same way for business.

If you have the mindset and go, hey, you know what?

I'm tired of being on that hamster wheel, all right, and just spinning my wheels, working for somebody else.

Because what people don't realize is if, say, you want 100,000 a year, well, you got to earn me more than 100,000 a year based on value, or I'm not going to be paying you 100,000 a year.

So it's probably got to be 2, 3, 400,000 years.

So, yeah, you could do it.

What do you say to people who maybe aren't sure?

Is there a mindset that you look for first when it comes to, hey, you're Perfect for running your own business, either buying or selling or starting your own.

It has to do with understanding the value that's required.

So, you know, I will sometimes meet people who want to, maybe there's some kind of professional, they want to get into their own consulting practice and they're thinking like a wage earning employee, you know, maybe they were earning 50 or $60 an hour equivalent sal salary at the place that they were working.

And so they come out into the consulting world and they hear that consultants are charging 2,500 a day or something like this, and they're like, oh my goodness, those rates are so much higher.

And what they don't understand is that 80% of a consultant's time is often spent chasing work.

And so the marketing versus delivery is radically different.

So if you're going to spend 80% of your time finding the work, then you've got to make your entire annual salary on 20% of your time.

And then if someone is going to pay you say 2500 or three grand for that day of consulting work, what do you have to deliver for them in order for it to be worthwhile for them to pay you that?

And oftentimes there's no guarantees in business, of course, but they have to have the belief that they're going to earn 2, 3 times the value of what it's going to cost to hire you, or else it likely doesn't make sense in that they probably have other places they can deploy their capital that likely will have a better opportunity for them to pay off.

And so understanding the point of view of your prospect, understanding what it is that they're looking for is key.

And then you have to be able to confidently present that, which I think is a real issue for people.

You know, I've spoken a lot to real estate agents over the course of time, and I've always said that if I was going to be a real estate agent, I would work with buyers who were looking for a certain kind of thing and I would make them pay me upfront.

And because I'm going to do X, Y and Z for them and I'm going to deliver in a certain way and present them with certain value.

And almost every real estate agent I've ever heard or ever spoken to says, oh my God, you can't charge a buyer money.

They expect to get it for free because that's the way it always has been.

And you know what I hear when I hear someone say that is I hear somebody who's not confident in the value that they Deliver, they'll talk all day long about the value of their service.

If it's worth something, shouldn't someone pay for it?

Right.

That's the way I believe no 100%.

I've talked to realtors that were actually said start charging for the listing agreement 50007500 as an advance and then that fee will come out of the final closing costs.

But if you're going to engage me, develop strategy and whatever, what's that worth?

If they don't pay for it, they don't value it.

Right.

And that's the bottom line.

So it's re.

It's changing the game.

It's disrupting.

Do you find you've.

You've seen hundreds of different types of businesses and industries in today's world?

There's always quick fix.

People are looking to build something quickly.

It's the younger generation.

They want to be influencers.

Are there businesses that hey are just going to do well?

And in the age of AI, for instance, like to me, service business, if you're an electrician, if you're.

There's just a new angle to it or new pro.

Are there certain companies or businesses that hey, they're going to be successful versus hey, don't do this one.

So there are some ideas or investment theses out there.

I work with buyers and sellers and one of the things that I hear a lot in the online media about buying businesses in particular is that you want to get into a business that Amazon can't deliver and the Chinese can't execute.

Right.

So, so this is where like this is, this is where you get this idea that people want to own like plumbing companies or air conditioning repair businesses.

Right.

They have these ideas that number one, people need plumbing so the demand is always going to be there.

And nobody can ever deliver air conditioning in an Amazon box.

Right.

Or repairing it at least.

Right.

And I find it fascinating that people will hear these kinds of stories and not ever question them.

I had a conversation the other day with someone who is chasing after plumbing and electrical businesses and they said it's recession proof.

And I said, recession proof.

I said, explain to me why it is.

And the guy just said, well, if my plumbing in my house breaks, I've got to get it fixed.

And I asked him, I said, have you ever been unemployed?

He hadn't.

And I said, if you are unemployed and the plumbing in your bathroom breaks, you are not going to pay $300 to get a plumber to come and fix it.

You're going to do it yourself.

What you're going to do is you're going to go on YouTube and then you're going to go bug the guy at Home Depot and you're going to go back home with the things that he sold you for 30 bucks.

You're going to fiddle around with it for half a day and then you're gonna go back there and ask him more questions.

Then you're gonna come back to your house and you're gonna fiddle with it for the rest of the day and you'll get it fixed in something a plumber could have done in 20 minutes.

You're gonna spend 12 hours doing it, but you're gonna save $280.

That's what happens when people are unemployed and we have all these big skyscrapers going up all over the place, and because of the current economic conditions, nobody's starting new ones.

Well, guess what happens to all the tradesmen busy in those towers when their projects come to a completion.

They're going to be looking for work and they're going to end up in the service side of things and they're going to put an ad on Facebook saying, I'll fix your pipes for $100 cash.

Right?

And so I know tradespeople who've been through recessions and they say it's brutal.

There's price competition, there's all these one man show pickup truck outfits that get started during those times.

It's hard to compete.

And the last thing you want is to have bought a business with 80% leverage with a huge bank payment and then all of a sudden be facing those kinds of pressures in the marketplace.

But the problem is we've got people chasing plumbing businesses who've never been plumbers or never been in the industry and don't understand how these forces come into play.

And that's the thing that I find just absolutely weird is that people seem to have a lack of imagination or empathy or being able to actually kind of role play in their mind what they think might happen given certain scenarios.

And I don't know if it's just a lack of creativity or if people really are so eager to get this magic bullet, get rich quick kind of thing that you mentioned that when something sounds like it could be true, they just grab onto that with both arms and hope that it's real and pursue it.

Well, they seem, I think you're bang on.

They take the least line of resistance and they don't think it through.

This is why I think having the value of that coach on the outside, somebody who can look at the blind spots and question things and going here's why that doesn't work, here's why it could work, here's how you could make it unique.

So I think having someone like what you do becomes valuable to it because it's like, hey, is this a good opportunity?

Or create something new, unique, rare and precious, Something distinctive.

So I think that matters Are you.

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And now back to my conversation with David Barnett.

A lot of people wonder sometimes, you know, do I buy a business or start a new business?

And you kind of wrote the book on that.

So buying versus starting a small business.

What's the pro and cons?

When should we be looking at buying something existing and when should I be thinking, hey, maybe I should just start one?

So when you start a business, you've got usually some degree of overheads.

Now this is getting easier all the time here.

With all of our technology, you don't need to buy a $3,000 cash register anymore.

You can subscribe to a Shopify point of sale for 20 bucks a month or whatever it is.

And so it's getting easier and easier to start a business.

But you've always got this certain Runway where you have to bring in enough paying customers to breach that break.

And I describe it as multiple break even points.

Because when people typically start a business at first they're just trying to get their costs covered and they're not paying themselves maybe for the first while.

And then as soon as they get those costs covers now they need to try to draw a salary.

So there's like a second break even.

And once they start drawing a salary, then they, they're exhausted because they've been working so much, they want to bring in an employee.

So now there's like a third level of break even.

They get to.

And the problem is we don't know when specifically you're going to hit those three points.

And so this is where it introduces risk.

And when you start a business, you can, you're risking your time, you're risking your startup capital.

Banks don't generally lend to new business startups.

You might be able to lease a van or something from Ford or something like that.

And so the amount that you're risking can, you know, not get too bad for most people.

When you buy a business, you've got the customers, you have the employees in place, you can be reasonably sure what sort of cash flow is going to exist.

So for the longest time I used to tell people that by hands down, the lower risk path is to buy the business.

But here's what's happened is there's been a lot of excitement around this idea of buying a business.

And people are talking about the silver tsunami and all these baby boomers getting into retirement age and they're sucking in these people, like the people I mentioned who were looking at the plumbing business, who have this notion that there's this absolute guaranteed gold mine in doing business acquisition.

And what's happening is people are paying higher and higher prices for these businesses and they're applying more and more leverage to buy them.

And the problem is if you overpay from a business, what you actually are in the same position as the startup.

Because now everything has to maintain itself perfectly in order for you to make the debt service.

And if you lose a customer, that's the same as not being able to hit your break even.

You can start to fall behind.

Now.

You're cutting, you're cutting your salary, you're increasing your hours.

And not only have you risked your down payment money or like the startup person put in their money to begin with, but often you've borrowed now hundreds of thousands of dollars or millions of dollars from a bank.

And so if things don't work out precisely perfectly, you're like guaranteed to end up in some kind of insolvency.

All you're doing if you overpay for a business is you're trading startup risk for financing risk.

And this is why it's so important to understand how to make a deal work for you and to Manage the risks properly.

That's a big part of what I do with people that I'm working with who are trying to buy, is identifying the risks.

And I'll give you a quick example.

There could be a business that has a customer concentration risk.

40% Of sales go to one customer.

Well, when we look at a business like that, if it's risky, because if you lose that one customer, the whole business doesn't work.

So how would you be able to buy that business?

And so we'll go through thought experiments like what would the business look like without that customer?

How could you adapt?

Could you actually turn it into a money making business again?

You'd have to lay off some people, maybe you'd have to sell some equipment or, or shrink your footprint of is it even possible?

Is there a 10 year lease in place?

Like we look at this and then we say, okay, so here's the business without the customer, here's the business with the customer.

Now we can safely buy this thing if we make a deal for the business without the customer.

And then we make the difference in the values contingent upon that big customer's continued participation with the firm.

And so what we do is we organize a deal such that the seller of the business continues to be exposed to the risk of that big customer concentration that they created when they were building the business.

But it's the only way the buyer can do the deal safely.

And when the seller sees what that looks like, it could be, hey, I'll give you 50% down for the business and the other 50% you're going to take payments for over the next seven years.

They don't like it.

But there isn't anyone who is cautious, intelligent and wise who's willing to write a check for that business.

And here's what messes up this marketplace so much, Michael, is because there are buyers in the marketplace who are not intelligent, wise or cautious who come in, look at a business like that and go, great, I'll buy it.

And then they get a mortgage on their house and they pay the price.

And then that guy goes and talks about it at the golf course and they skew the expectation of all the other business owners.

Because people hear about these incredible deals that people are making and these sums of money that they're getting for their businesses and it's, it really makes it difficult.

And so doing a deal to buy a business can be a lot of work.

To find the right deal to negotiate a deal that makes sense from a risk point of view, selling a business can Be difficult too, because it is a secret marketplace.

You can have a really great business and if you can't connect with the right buyers, you're going to have a hard time too.

When back years ago, I started off as a business broker between 08 and 11, which was, you know, a great time to be a business broker.

As you might imagine, we routinely had selling clients who, who would be with us for years and they had good businesses.

It was just the problem was finding the right buyer who was going to have the skills required to be able to take over that business.

Because again, different kinds of businesses have different degrees of transferability depending on how you've built the business, the systems you have in place, the governance structures and the processes, all the stuff that people talk about, that Michael Gerber E myth stuff.

If you don't have that in place, you can still sell a business.

It's just you need somebody with a special skill set who is kind of like you, but younger.

And it can take a long time to find that perfect person to fit into your organization.

No, it makes sense.

I've seen it work both ways.

I've seen, I've got a buddy of mine and he's got a number of businesses and people, you know, in that 7,800,000 a year range, they want a retirement, they're not able to grow it.

He brings some technology into, change the game a little bit and improve it.

But then he'll go from a nice check up front and then he's got some financial staying power.

But he also shows him, hey, we'll keep the client base and every year we're going to release more and more to you and keeping the clients or key personnel or key individuals.

And I've seen it work the other way where a key personnel person leaves, goes and starts their own business with it and take 30, 40% of the client.

So I think having somebody who can ask the tough questions because I think we get into it emotionally, we want this to happen and therefore we put the blinders on and we don't actually do our diligence the way we ought to be doing and create opportunities from there.

Would you like to hear some sobering statistics?

Yeah.

Yeah.

So the best we know, about one in five businesses will ever change hands.

So there's a lot of people out there who are building a business and taking profits out of it.

And it works really well for them.

And they may have the assumption that they're going to be able to sell that business someday when they choose that they want to.

And that sale is going to be able to fund some part of their retirement or what have you.

And the reality is that it is very difficult to do a successful transaction to sell a business.

And there are a lot of business owners out there who have deceived themselves as to what the value of their business may be.

They've heard something, they were told something that is completely off the wall.

And then they're operating with the assumption that somehow applies to their business.

They see something in the news about some kind of firm that sold for a certain multiple of cash flow and they just assume that is going to apply equally to their business when they could be talking about apples and oranges.

Completely different situations.

And this is why we get scenarios where people vastly overestimate what someone would be willing to pay for their business.

And when people rely on those valuations, what ends up happening is they get to the point where they want to retire, they're expecting that their business is going to sell for $3 million or whatever.

Then they're shown that nobody could possibly pay more than maybe 1.2 and that's not enough money.

And then they end up stuck.

And this is when you see these 75, 78 year old business owners that are still in their business because they didn't have a choice.

They're cashing out of a business is something that happens in Silicon Valley.

It's really a unicorn story that is great in a podcast.

It just sounds wonderful.

Wonderful.

When people have these huge exits, the reality is that small businesses sell for a relatively low multiple of cash flow.

And the true value in a profitable small business is never the exit.

It's always just in the operation.

It's in owning the thing and making the profits.

And here's the key.

You've got to pull money out of that business, develop some alternative wealth on the side.

Stocks, bonds, real estate, whatever it's going to be for you so that you have a fallback, a plan B if you, if things don't work out in the sale, or if things just don't work out in the business, period.

Now people who run a business for 20 years really get sucked into that normalcy bias.

They really think that because they've been doing it for 20 years that it's going to carry on for another 20 years.

And I've just seen the wackiest things ruin businesses that are completely outside the control of the owner.

You know, well, it's like our businesses, my speaking business, there's no way I can sell it.

It's me.

All right?

My training company, our intellectual property.

Yeah, somebody could buy it.

But it changes.

And in today's world, it changes all the time.

I call them engines of revenue.

So I might have a financial portfolio of investments that I manage and look after that.

That creates income.

Then I have.

My speaking business.

Creates income.

Three or four.

You can have three or four and have little businesses that generate income, supplement pensions.

And pensions can be another form.

But.

But don't plan on living on it.

And what if it's not here one day?

So I think you're right.

It's having something.

Have some fun now.

There are also some great tax advantages to having your own business.

Like I've.

I'm at retirement age now, where I'm at, but.

And I actually don't take a salary any longer because my, my wife runs our company and you know, people get their paychecks.

But I don't take a salary at this point just because I'm trying to see how much can I actually live into retirement for.

And I don't believe in retirement.

So that's probably the big key right there, is I like what I'm doing.

I mean, you're a speaker.

We write the books, we've got new projects coming up.

I'm still relevant today as I've ever been.

But I'm trying to say, okay, if I don't take a salary now and how can I do this?

How can I live?

Because I still want to stay active.

What are you seeing out there?

Are you seeing that with a, you know, people, Maybe the other business?

Because I've talked to people in retire.

I moved into a retirement community and for five years and you know, we moved out because the thinking was guys were missing the deals.

They were missing working.

If you've been an entrepreneur and you've worked for yourself working for someone else or not doing it, like, what would you do?

Are you looking forward to that day yourself where you can go, hey, I'm done.

I'm not.

No, listen, I just turned 50 in the past year, so I'm eager to get to work here every morning.

I'm not even thinking about retirement, but I can see in 15 years time that I will maybe want to do fewer hours per week in the office and maybe focus more on going to conferences and giving presentations and workshops and things like that because I enjoy it.

It's fun.

Will I still be writing books?

Of course.

I'll just be downloading it directly from my mind into my computer probably by that time.

You know, just like inspiring ideas flowing through Some kind of brain.

Wi Fi, Bi fi.

I'm going to pat.

I'm going to trademark that right now.

Bi fi.

Yeah, I'm going to keep doing this stuff.

No, I am that age right now.

I'm 66.

And I'm still getting.

I'm better now I've ever been from my perspective and my audiences.

I've got what.

Why would we give this up?

I'm collaborating with the new technologies and with AI.

I'm making them my partner.

I'm senior partner, they're the junior partner, they're the interns.

And I'm bringing it.

And it's still fun.

So what, what am I going to do?

Stay home and do gardening or.

That's not my thing.

Right.

And you know, 60s, the new 50.

50 Is the new 40 and we're living longer and healthier.

So hey, why not?

You know, it's interesting, the illusion.

Let's talk about the illusion of zero down business deal.

The Internet is flooded with get rich quick gurus claiming you can buy a highly profitable cash flow business with absolutely zero money down.

So let's separate fiction from reality.

We've all seen the videos or headlines claiming you can buy an existing business with no money down.

As someone who spent over 20 years structuring real deals, what's the real truth behind the myth?

And what does a healthy financial structure actually look like for a first time buyer?

Sure.

So let me get something absolutely clear.

It is possible for somebody to buy a business with none of their own money.

It happens all the time.

But it's almost impossible for someone who is broke to do that.

So here's the clear distinction, right?

If you own a million dollar house mortgage free and decide to buy a business for half a million dollars, you just get a mortgage from the bank for half a million, you buy the business, right?

You just bought a business using none of your own money.

And so for a lot of these sort of get rich quick online guru people, there are nuggets of absolute truth in everything that they say.

But the presentation, in the way they frame it, creates an optimism in people who cannot actually execute the deals.

Because what they want is they want to inspire you to have hope.

So you'll sign up for their $10,000 program.

So here's the absolute clear first principles way to think about this.

A good, profitable cash flowing business is something of value.

It is an asset, right?

So if you are coming to the table with nothing, how do you expect to trade nothing for something of great value, right?

And so I've heard it 101 different ways.

And it all comes back to the same sort of formula, which is that you have to find some kind of doddering old character who happens to own this profitable business who doesn't really know what's in their best interest, has no good advisors who is somehow going to be willing to allow you to leverage up all the assets of the business, and then they're going to sell or finance whatever balance is left owing beyond that.

And somehow you're going to find a banker who's willing to do any kind of loan with no equity put into the deal.

Right?

No equity on the balance sheet.

And so I unfortunately meet a lot of people who've fallen for this.

They've heard the stories, they get excited, they buy the $10,000 course, and then they'll start spamming people online.

They'll find these deals, they'll make offers and then they apply at banks and the bankers keep saying no.

And when they keep having these deals fall apart, they'll go online looking for answers and they'll eventually find my content.

I've been making YouTube videos for 12 years on these topics.

And one of the very first questions that I'll ask them if they talk to me over the phone or over a zoom call is I'll say, what's the debt to equity ratio on your opening balance sheet?

And they'll be like, what's that?

What's a balance sheet?

What's a debt to equity ratio?

And like, it's the most basic fundamental concept in lending for commercial lenders is debt to equity ratio is how they measure risk.

And if you are putting no money into a deal, then you have zero equity and you are entirely debt.

That's infinity to one is your debt to equity ratio.

And most bankers don't like to go beyond three to one unless there's some kind of government guarantee involved, right?

And in the United States, you got this small business administration who's guaranteeing slightly higher leverage ratios.

So that's the basic truth is if you can do deals with no money down, if you have assets and you can manipulate those assets in the right way, there's a big one of these characters out of the uk, he wrote a book about how he bought a business using no money when he was the owner of a rather large business.

And so I read his book and I'm like, okay, so you leverage the balance sheet of your existing business in order to basically buy the other business.

And the lender looked at the combined debt to equity of both enterprises when they made their lending decision, but he never talked about that.

All he talked about was how he got a banker to lend him the money.

And it totally positions it as though anyone can just walk in off the street and a banker is going to lend them 100% of the money they need to buy a business, which is not going to happen.

You have to have skill, you've got to have character, you have to have reputation, you have to know what you're doing in order to even get past the application process on a business loan.

And if you are broke, the only way that I can think of that you can actually do a deal is by expanding what I call the buyer envelope to include other people.

So this would mean that you're going to get some equity partners who are going to contribute money, too.

But if you're broke, like, are your friends likely broke too?

Sure they are.

Right.

If you're broke, are you going to go knock on the doors of millionaires and get them all to kick in 50, 100 grand a piece so you can make an equity down payment In a business?

Like those people, if they've succeeded in business, they're going to ask tough questions.

They're going to want to know, how does this work?

You might be able to find an opportunity, work with those guys, and end up with a slice of the equity for yourself if you're qualified to run the business.

But now we're getting into more realistic strategies which are not as exciting as you can buy a business using no money.

No, that makes sense.

No, I get you've got a.

Well, it takes money to make money.

Unless you've got a really great idea and something where you're on Shark tank and even then you've invested some money to it and you've got an angel investor or something.

We know most of those deals all fail.

They'll invest in hundreds of them and you might get one unicorn out of the whole group.

So that kind of makes sense.

Let's look at the most basic tests that a banker will put on any kind of person for a business loan.

They will ask themselves, can this person run their household profitably?

Do you know what it's called?

Do you know what it's called when you run a household profitably, what the profit is called?

It's called savings.

Right.

Because it means that you are running your household with less money than you have coming in and you're able to save some money.

And so someone who can properly manage a household has an accumulation of savings and they start to develop some Wealth, They've got some money that maybe they invest it, what have you.

They have home equity.

If you're broke, it means you have not been able to manage your household successfully.

And now you're telling a banker that you're going to run a business successfully.

Right.

You see the stretch there?

Yep, I do.

No, that's a great analogy.

Perfect question to ask as well.

You know, a major trend right now is the concept of buying a job versus buying an investment.

You specialize in discussing FIRE strategies, specifically investing in small businesses for higher yields and absentee ownership.

Is it really realistic for a professional to buy an existing small business and manage it successfully while keeping their day job or remaining entirely hands off and maybe define fire, that acronym.

Yeah.

So I spoke at a FIRE conference last year in Cincinnati and that was the topic.

Can buying a small business be an accelerated pathway to financial independence?

The financial independence retire early movement.

And what I did is I showed people how businesses are an accelerant.

They are both a form of financial and labor leverage.

And if everything works out well, it can be very lucrative and exciting.

But then I showed people how the leverage works in the other way too.

And that's sort of when the gas got deflated from the room and people realized, oh my God, this is risky.

And that was the whole point.

Buying a business while you keep your job.

In my mind, there's only a couple of safe ways to do it.

You're either buying a business that is so simple and formulaic, like a subway franchise, where all of the dashboards and everything have been put in place for you to keep an eye on that operation.

Those people might be able to pull it off.

But the only successful pathway I've seen for people to successfully step away from a small business is this one.

I'll give you the formula right here.

So you buy the business, which is typically owner managed, and then you go in and learn from the seller and you become the new operator.

And maybe you're going to be there for a year.

And while you're there, you're learning everything about the business.

You're creating the systems, processes, the dashboards, etc.

So that you can then step back and have somebody else run the day to day.

But you can keep an eye on them with these key metrics that you've developed.

So I call it developing the area manager skill set.

If you think about a gas station, think about any chain of gas stations.

Every one of those gas stations has a manager.

But the people at the Exxon head office don't Let a manager run a station for a year and then send in the financial statements at the end of the year.

There is somebody overlooking the performance of that location.

They're looking at how many gallons of gas were sold, what the pop and potato chip sales were, and all that kind of stuff.

If things start to slip, that area manager is on the phone with the manager saying, what's going on?

Oh, construction on the road this week.

Okay.

Like, okay, I can see why the sales have gone down.

Or if we don't know, well, let's start watching the tapes.

Maybe we have a theft problem.

Right.

So that area manager understands the business, but they're not in the business.

But they know what to watch because they understand the business.

One of the biggest traps I've seen people fall for.

I'll give an example.

This was in Pennsylvania.

It was a transmission shop a Guy ran for 20 years.

He then moves to Florida.

Okay.

And after another 15 years of running it from Florida, they advertise it as an absentee owned business with a manager in place.

Easy peasy.

Here's the reality though.

A guy in Florida who ran the shop for 20 years knows everything about that business.

He can call the manager, he can log into the video cameras on his computer.

He's still running payroll from his kitchen table in Florida.

And in a brief conversation with the manager, he knows what's going on in the business.

If you've never run a transmission shop, you can't do that.

Right.

Because that guy has the area manager skill set.

So it's possible, it's not easy.

And that's one of the things I like to get to all the time in this whole world of small business, is that small businesses are risky.

It's one of the riskiest asset classes there are.

That's why the failure rates are high in small business.

You know, you had, had asked me about.

What was the other point that you had asked me about?

That I kind of skipped over there a moment ago.

Oh, buying a job.

Yeah, yeah.

So.

So can you invest in a small business and outperform things like the stock market and all those other kinds of things?

It's possible, absolutely.

Is it guaranteed?

No way.

You're talking about higher, much larger oscillations in potential swings in value, revenue, profit, etc.

Than what's going to happen over a Coca Cola, for example.

Right.

Most people who go into this world of buying a small business, they are interested in buying a job because they're being motivated to get out of something.

Typically they don't like they don't like their corporate job.

They want to have more freedom and control in their life.

So they're going to look for a business.

And this is the ideal scenario is you look for a business that is earning money and has a real value because it's cash flow positive, but it has problems you can identify and you know how to fix.

Yeah.

Because if you can bring your skill set from whatever your background is and you can make the business better, then you're going to pay a fair price and then you're going to get in there, you're going to improve the business as you're going to have a higher cash flow.

This is where you get the sort of outstanding returns.

It's by having the inside knowledge.

And that's why I always say to people as they're getting started in a buyer journey, what is your experience, what is your background?

What do you know about that's applicable in this space?

And if you are a person who, a corporate person, that is a very pigeonholed role that you do your one little thing and you do it very well, it can become easy to believe that because you do your one corporate job very well, that business is easy.

And what corporate people are insulated from is all the other roles that exist in the business.

They just don't see, they don't see what's going on.

Right.

And so I've challenged people before.

Like before you quit your job at the big Fortune 500 company and go buy the, the gourmet burger stand or whatever it is, go work there on the weekend, see what it's really like in there, see what it's like to serve the customers, what goes on in the kitchen, see what happens amongst the staff and you know, the issues that come up and really, really good.

Yeah.

Get an idea of what goes on in that business.

You, you can actually get, get paid to learn about businesses by going and working there.

And it, that's what I have to say about that.

Does that answer your question?

No, it's good.

Let's talk about buy versus build.

So sure, starting from scratch has a certain romantic appeal, but the data says it's statistically a fast track to failure.

Right.

So why should an ambitious entrepreneur consider spending the capital to buy an established business?

Might be boring over the excitement of starting something brand new one from scratch.

What are the immediate advantages you get on day one when you buy instead of build?

Well, you get the cash flow right away on day one when you buy a business.

Right.

And so the trouble though is that if you overpay, you end up with those risks we talked about earlier.

I'm not always a fan of starting something that is entirely new or novel.

You know, some of the greatest stories we have about entrepreneurship are the people who created some absolutely new, novel thing that was totally new.

And the problem with that is that not only do you have to find customers, but you have to educate people as to why they need your thing or your service.

Whereas if there's a new town that's growing quickly because they opened a mine or something, hey, there's more and more people moving there.

I'm going to go open a shoe store.

Everybody knows what a shoe store is.

Everybody knows what shoes are, Right?

And if there's more and more people there, they're going to need shoes.

And so if someone's going to start a business, I'm actually more a fan of starting a business that everybody already understands.

You just have to find a market that is somehow underserved and look for that opportunity to open your door and get in there.

But creating something entirely novel and new, I just.

You've got such a huge headwind.

Not only do you have to find the customers, but you got to teach them why they need it.

It's tough.

Good product.

Let's talk about designing a business to sell, even if that's not plan A.

So building a business without an exit strategy in mind, it's kind of like jumping out of the plane and trying to sew a parachute on the way down.

In your book, how to Sell My own Business, you emphasize that owners must build and manage businesses in a way that allows it to be sold, even if selling isn't their current plan.

What are two or three operational habits business owners should start implementing today to ensure their business remains sellable tomorrow?

Yeah.

So whether or not you're going to be able to sell your business comes down to two questions.

The number one question people have is, what is the demonstrable cash flow?

So the demonstrable provable cash flow that is seen to be resilient and continuous.

So that's the first thing that's going to determine the value of your business.

The second question is going to be from a buyer is will that cash flow continue once I buy it?

That's when you get into all that e myth Michael Gerber stuff of systems and all that kind of stuff.

Right.

And so here's why it's important for people to make their business salable immediately.

Okay.

The top five reasons small, privately controlled businesses go up for sale are burnout Boredom and fatigue, divorce, poor health, the need to relocate and retirement.

Only one of those things is planned for.

The other four things come at you out of the blue that you never plan for them.

And all of a sudden you have to deal with them.

And what ends up happening is you realize I cannot continue to manage this business because of the reason.

And then you realize, shoot, if I'm stuck here, this personal motivation, this personal reason is going to cause this business to deteriorate because I can't give it the attention, care, vigor, energy, etc.

It reflects requires to keep moving on all cylinders.

And so things will start to fall apart.

And when people get to that point and they have not been managing the business in a proper way, then they need to get out fast.

They will end up doing a deal that is not attractive to them because they've got to sell it quickly.

As soon as you get more than two calendar quarters of decline in sales or profitability, everyone starts to assume there's something major wrong with the business and they don't believe that they can fix it.

They're all of a sudden start discounting you for all the risks they perceive might exist because you've got a downward trend.

And so this is why it's key to make that business into a saleable condition.

Keep it that way at all times.

And if you are planning to retire, you need to seriously move towards exiting.

When you are on an uptrend, that is the time to go.

And that's the least attractive time to go because.

Because people will say no, things are ro cozy right now.

I'm making lots of money.

And.

And this is the thing you have to realize is that because businesses sell for a relatively low multiple of cash flow, it could make sense to keep running it at full power for another three years and then sell it for less later.

But you want to be the one that makes that decision.

You don't want that decision forced upon you when you'd rather be doing something else.

No.

Good question.

Last question for you.

You authored a book called 21 Stupid Things People do When Trying to Buy a Business.

I know you're on the second edition.

So it's got more available.

It's now available with more stupidity in real life case studies.

Yeah.

So without naming names, what is one of the most common yet completely avoidable blunders you often see smart corporate executives make when negotiating a private business transaction?

Yeah, it's getting advice from the wrong people so people will go and seek counsel from people they trust, even though those people may have no particular insight, credibility or capability in the world of business.

And so that's got to be one of the number one things that I.

See quite often we have time for one more.

So let me get this one in.

Ultimate skill set For a modern business buyer, it's not just about having the money, it's about having the right tool belt to handle the asset once the keys are handed over.

So if someone listening today is inspired, take a leap, buy a small to medium business.

What are the primary skills that they need to cultivate within themselves to ensure they don't just close the deal but actually successfully manage and grow it post acquisition?

It's to make sure that they have a capacity for accountability and responsibility because you become the end of all blame chains like you are the one that's in charge of everything.

Yeah.

And some teenager that you hire that drives a two wheel handcart into some lady's dog and or scratches the side of her car or whatever, that could make its way all the way up to you, you, and this is the reality of small business is that the buck stops with you and you have to be ready to shoulder that and to be able to compartmentalize, I think to be able to survive day to day.

Hey, that's good advice.

When should people who are listening contact David Barnett and get his insights and wisdom?

What's the right client for you and what's the best way for them to find you?

Sure.

So anyone who's interested maybe in buying a business one day or if you own a business and you want to expand it through an acquisition, then and I'd be here to help you out.

And anyone who owns a business that would like to exit sometime in the future, Even if it's 10 years away, you should reach out as well.

Because doing a most probable selling price evaluation to really show you what your business would sell for in the marketplace would be of huge value for you because not only does it show you what the business is worth today, but if you start to get them updated every couple of years, it gives you a scorecard of where you're going and it can help with big decision making.

So I've seen people, for example, invest hundreds of thousands of dollars in upgrading equipment and stuff and then later they'll meet me and I'll show them their business is actually worth less than what they invested recently in their new equipment and they'll say, how can my business be worth less than the money I just invested?

And I'll say, well, because you're not getting a required rate of return out of that capital.

Your business has never been worth that amount of money.

In fact, you probably should never have made those investments.

You probably should just taking the capital out and close it up or something.

And the problem is that people have these notions of what their business is worth.

They have these expectations based around the effort and the time and the labor they've put into their business rather than having an understanding of what the market actually sees as value in their business.

And that that differential can be huge.

Oh good stuff.

So if you're buying, selling or starting davidcbarnett.com and they can call you for a consultation, I'm imagining and we'll have all that information in the show notes hey David, thanks so much for being our guest today.

Lots of great value, lots of good insights for our listeners.

Thanks for being here.

Thanks Michael.

This has been great.

If anyone's interested in these topics, just look up David Barnett, YouTube, any audio podcast app.

I've got hundreds of podcasts out there.

I'd love for you to come and join me.

There's a ton of great stuff and value stuff there.

So thanks again for being our guest.

As you were listening to this episode, what is one idea that you've heard that's caught your attention and why does it matter so much to you?

And who is one person who you can share that with, either sharing this episode or just sharing that insight that occurred to you while you were listening?

Perhaps it is understanding that overpaying for an established business simply trades startup risk for heavy financing risk.

Or maybe it is recognizing that major life disruptions like health issues, divorce or burnout are usually unplanned.

You must actively keep your business in a sellable condition at all times.

Thank you for listening, for learning, and for investing in yourself so that you can become the best version of you.

If you found value in this episode, please write a review on Apple Podcasts.

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Until next time.

This podcast is created and associated with Summit Media.

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Goodbye.