David Buys a Business and Puts a Manager in Place for Passive Income | How to Buy a Business
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- Опубліковано 1 сер 2024
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So, If I was a business broker and I had all these sellers coming to see me, why didn’t I just buy some of the businesses and put managers in place so I could enjoy some passive income?
This week I’ve been asked why I was so foolish as to not take advantage of free money with no work. Duh, I must have missed a lot of opportunities.
Seriously though, lets examine this idea of being a passive investor who let’s other people manage a small business for them.
Bonus: I’ll tell you the story of when I actually did pull off a deal like this and what the real-world results were. Not so passive I’m afraid.
Watch the video:
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I have been a Business Broker for ever! The reality is passive income in a small business is like hitting the lottery. I have sold the same restaurants over and over again because the owner customer relationship is extremely important. This goes for all small businesses. In fact, if the owner is the primary contact for a small business I will value the business at 50% of what it is worth. Very few of the small business that come across my desk I would even consider as a business. They are actually self-employment. Kodo's to those who love their business and make a decent living (without dragging in family members). Before you ever think about a small business. Make sure you love that industry (have experience) and have entrepreneur skills. Oh, try not to drag your parents life savings into either.
Great comment Micky
Perfectly said. And yes even I will do the same, valuing the business at 50% where owner is the primary contact of the business.
Love this insight. I enjoyed this video. Keep up the good work David.
I have found that when an owner starts distancing herself from the business too much, managers and employees (called agents in Economics) start getting funny ideas. They can start selling their products using your infrastructure; they can leave bills unpaid and lend themselves money that they think is temporary but ends up being permanent when they suddenly leave, they can start caring less and less for the business and use it as a mere floating device to jump ship. Being too far away from your business is inviting trouble. A Saying in Spanish goes “even the just will sin before an open coffer”. Super interesting David, thank you.
Great comments Javier.
Along these lines, there is an investment manager, hugely successful, everyone knows the name, I won't mention it. During covid 'work from home' he discovered a small minority of his staff were doing all the work. Six-figure salaries are the norm in that business.
People-managing seems hard. You'd think these highly-compensated people would recognize their good fortune, their highly-desirable jobs, and there wouldn't be any 'fat' in the company. This investment manager vowed to fire a bunch of staff when he discovered what was going on.
The idea that you can allow staff to work 'remotely' just sounded impossible to me. Because even when they're on-site all day during the week you still have to monitor their output.
Your videos are so full of excellent information. Thank you for sharing your knowledge!
I'm just trying to fulfill my mission of helping people avoid bad deals. Thanks for watching and please remember to like, share, dance and sing.
Correct me if I'm wrong, but it sounds to me like the problem you had was not allocating those human resources as part of the cost of the business when considering buying. You cannot run a business without a book keeper. Your manager cannot be the manager and the book keeper, not unless you want one of those jobs to go undone, and an eventual resignation from an overwhelmed manager. Therefore, you need to factor in the cost of an accountant. If you want to sit at home and count the cash, you have to hire the human resources needed to do all of the jobs on site. And if the business does not have the revenue to pay for those resources, then either walk away, or accept that you are buying a JOB. This is likely the reason the previous owner wanted out of the business; because she didn't understand how to staff one. Seems like common sense, no?
Hi Michael, Yes, you're dead on! You should watch this related video: ua-cam.com/video/GszdyDQulEI/v-deo.html
Agreed in entirety.
So lesson from this... Don't buy small
Michael Frank I am glad to have found this comment and the reply. As I am a bookkeeping student and a Level 3 Business, Marketing and Finance student. I was beginning to worry that if I were to buy a business, that I wouldn’t be able to re invest my net profit into buying more/different businesses or buying the same category of business and expanding it. As I’d not be able to get a full hands off experience which I would really like so that I can progress to buy even more businesses with my net profit
Michael Frank there’s a website called businesses for sale. Do you think this is a legitimate website?
Thanks for making this video. I had considered buy a business for about $200k down plus seller financing and have a friend run it. The problem was that I have never run a business before, I might buy my first one soon. So, It wouldn't be passive income for me. It would probably be very, very active income. I may hire my friend for a better opportunity that I intend to be the full time manager / president. Another great video.
Thanks for watching Alex. I'm glad you're enjoying them.
I have experience in running businesses I was my first bosses go to person for making purchase order and for running the floor your best friend is experience work in the business for a while . Try to work for the owner and learn from your mistakes . Mistakes make you stronger in your sector . Then decide if the business is profitable and look into the future then decide if you want to buy the business
Good luck to you hope your venture goes well !
Hi David
Great video, makes sense to me as a small business owner. I have put systems in place and have some great staff. But I still have to get involved when they hit problems, even though I have given them training if this happens, do this, if that happens, do that.
I have followed the Michael Gerber e myth but in reality it is difficult to wrap my business into a turnkey business and run passively. I think I am getting closer to the solution, but then it escapes from me when the staff call up with problems.
Yes, I've lived and observed your experience many times. Thanks for sharing.
So I believe that means your at the stage where you need to hire and fire and think about who u have in charge as head of operations in your business many companies run thru many CEO’s before the find someone who can replace them completely and take care of things as need be
Hey David I think you need to qualify ‘small business’. For $100-150k/yr plus bonus you can hire pretty strong talent. You also don’t mention incentivizing them with equity and/or profit sharing arrangements based on cash flow targets.
No, those things may work. Good points.
Great video
Hi David. Thank you for the great content. Can you share what the business that you and your wife bought was? Was it a franchise? What kind of business?
Hi Oswaldo. It was a trophy and engraving business. They did sales awards for companies, trophies for sporting events, fancy wedding gifts with engraving, etc
It seems to me this is actually one of the reasons why small businesses are great investments, you have to make great decisions and be more involved than other passive income sources so you are rewarded with higher returns. I would also like to inquire however, because all of the tasks you mentioned could surely be handled by an employee. It would appear then that passive income achievement is merely a balance of your return and hiring people within those margins to take care of all the tasks that may have been left to you otherwise.
Bret- You understand perfectly.
David, please make a video on how to use grants and subsidies to your advantage in Canada. It's like your making the government fiance your business. Government financing + seller financing= ROE through the roof.
Great idea, I've got a lot of experience researching and learning about these.
I see this quite often from people that leave their corporate careers to buy a small business. They are shocked that the labor pool, even on a manager level, is not the same as their former coworkers that cared about their careers. I think part of the problem is that it is a SMALL business so there really isn’t much advancement available and therefore not much of a “career”.
Bobby, great observation.
David if this is a kind of service business.a business that give service to their customers
actually I want to create home automation business but I want to spread this but it's hard to manage in multiple places so I just build a branch in that places hire some workers and a manager
As long as you have the systems in place to make sure people are doing what they're supposed to. This is how most businesses grow. The problem many entrepreneurs face is that they are perfectionists and micro-manage everything. They have a hard time letting employees have responsibility.
What about buying (say) 10 companies, owned by a holding company and have the managers of the 10 companies report to a CEO of the holding company?
Sure, if you can get competent management. When people try to do this with businesses that are too small, they often can't attract the right talent and get pulled back in every time there are staff changes. Unless they're properly systematized.. www.EasySmallBizSystems.com It's also why you see this often within an industry, so the businesses can share resources.. For example, a person who owns 5 restaurants. They may have one HR person, one central bookkeeper, etc.
Brilliant....about to buy a business
Thanks Ivy, I'm glad to be helpful.
David can you do a video on absentee owned businesses?
Sure, I'll add it to the list.
I thought about this myself and what i think is that its better to buy a small business (less than 40k in profits) or a big business( more thab 150k in profit) , a medium one (around 60-80k) is bad because you dont have enough money to pay someone to manage it or is not worth it, as for the small one its probably too small that you only have to put in a few hours a week, as for the big business 60k for a manager that does everything (you dont have to put in a single minute) and lets say that business makes 150k in profits that still leaves you 90k which is more than enough to live good. I would really appreciate it if you could answer and give a feedback on my thought
The big chain businesses like Olive Garden, have another competency that goes beyond the manager: the systems that manage the managers. I'm going to add this topic to my video question list as it came up earlier today as well. Cheers Jousey, thanks for watching and be sure to get on my email list at www.DavidCBarnett.com
David Barnett thanks for the answer but do you agree with me tho, also im 19 and trying to buy a business, recently got rejected a loan application even though i got a good credit score, some money saved up and never missed a payment on anything. I also watched your video on how to buy a business with no money and gave me hopes, i would really appreciate it if you could guide me on buying my business, i already have a plan i just need help on learning/ knowing what i should look for when buying a business.
@@jouseyjunior8874 You're better off buying a larger business that can support a management structure, otherwise you're simply buying a job and you're probably better off starting something from scratch. This should be decided on a case by case basis, of course
Great Content! New Subscriber.
Welcome aboard Luc! Nice to have you. You should join the list www.DavidCBarnettList.com
money follows management
I agree Tom.
Hi David, thanks so much for your content and expertise. I started thinking about buying a business after a popular UA-camr made the idea of buying "boring businesses" instead of starting businesses or buying real estate cool with her great marketing strategies. Her content makes me feel like anyone can do it and mostly with seller financing (not just outliers). You might be familiar with her content - if you are, do you have any thoughts about the accuracy of it beyond her great marketing?
I pull info from both of your channels as I continue to learn about this subject.
Have you seen this video? ua-cam.com/video/ww4XRyMgHrY/v-deo.html
@@DavidCBarnett not yet. Thanks for flagging!
Im in the market for small businesses and Im running into this problem, the majority of deals are simply too small to put a manager in place - in some of the facilities there's not even office space for an extra person. The bigger deals within this industry (500k-1m) would be allright if a few could be bunched up together and ran like a single entity. It just feels like a waste of time when the deals are sub 750.000€
The SME market is inefficient and non-transparent. It takes real work to find great opportunities. Most people are lazy and won't do the work. Also, if you're just looking at broker listings, you may be missing the best ones.
@@DavidCBarnett Bingo. This is a market that's begging for disruption. The person or persons who figure out the secret-sauce will be very, very well compensated.
@@DavidCBarnett
@David C Barnett Small Business and Deal Making SME
Would you recommend having a broker to deal with when finding good deals early instead of just looking at listings?
"Passive income" is subjective
Phil- Totally. Thanks for watching.
Hey david i want to buy a buisness but i dont have a llc and i dont have credit yet do i need those and is there any tips as to when it comes to getting loans and seller financing?
Lots, watch this channel and sign up for Business Buyer Advantage when you have some money. More than credit, you need cash to buy a business. 1/2 of your desired SDE is a good rule of thumb. So, If you want to buy a business which earns $60,000/yr for the owner, you need to have at the least about $30,000 in cash or equity like in a HELOC. So, focus on your money game and open accounts like credit cards so that you can build your credit score.. just don't get a bunch of consumer debt. Cheers.
I think when answering this question you can really compare yourself to Warren Buffett, in a sense that the conglomerate he owns (Berkshire Hathaway) also owns over thirty different subsidiaries, of which he has very little input into the day to day operation of the business. However, he continues to assess the growth potential, cash flow statements and more when trying to understand how to allocate his money to help grow the company in the future. In other words, nothing is completely hands off yet the type of work you would be involved with once you have found good management and set up a great incentive package is more than likely longer term.
Yeah, I think you hit this dead-on. If you think of the biggest shareholders out there, the pension funds, many of them have people on staff who watch their investments in much the same way. You've always got to be keeping an eye on your interests no matter what they are.
David, is there any way to get a business loan from say, LendingTree to buy a business using the business you want to buy as collateral?
I don't know much about Lending Tree. Using personal credit to buy a business is often the way small businesses are financed.
@@DavidCBarnett Thanks for your reply, David. There are a lot of companies now offering loans to businesses. LendingClub offers loans to individuals and LendingTree to businesses that have been around for 2 or more years, etc. Having said that, I have NOT done business with LendingTree but my friend took a personal loan from LendingClub recently, he absolutely does NOT recommend doing business with them.
An illusion at 2:30 ahah so true
You like that? I thought it was funny too.
HI David, I am looking for a million-dollar business and up. The reason why I don't want less than a million is that if I buy it I will get stuck in it. when looking for deals can you check the amount of sales they do without asking them for their data?
Depends which country you're in. In some European countries, financial statements are public record. In the US or Canada, they're private. You can usually use another 'non-secret' way to find out about their sales volume depending on the industry. For example, 'I'm looking for a business in HVAC industry with 5 or more technicians.' There's a good chance they do more than $1M in sales.
@@DavidCBarnett what are the secret ways then? I wont tell.
Hi David. I live in South Africa and want to immigrate to the States. I saw a immigration lawyer and he advised getting in with a L1 visa through buying a business. My current setup is as follows. I am married with two children (11, 13) my wife works and owns part of a small family business. I quiet my job 2 years ago and I now do consulting (which is not working out too well). We want to make a permanent move to the USA but we are very overwhelmed by the idea as we will have to sell all our assets (house, farm, car) to have enough money to relocate. My question to you is how can I get some assurance that if we make the move that it will be successful? I know there are allot of factors at play here.... Let's say we have about 60k to buy a business what would you recommend to buy to sustain and support an income for my wife and I to support our 2 children and live a middle class life? (We have looked at Florida but are considering Texas). I enjoy your videos and they are very informative. Thank you for the advise in advance. Regards Herman
There are no assurances in business, furthermore, when you relocate to another country there are cultural differences which can also make things harder. The easiest businesses to run are usually highly priced because they're attractive to immigrants with language barriers.
I'm not an expert on the L1 visa so you'll have to get information on that elsewhere. I understand the motivation to emigrate from SA given the current situation politically. Have you looked at other countries?
My region of Canada is so desperate for immigrants that you can land legally here and start working in about a month once you have a job offer. This may be the lower-risk way of getting out of SA that you're looking for, then you can make a decision about the USA later.
Check this out: www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/atlantic-immigration-pilot.html
David Barnett Thank you for the advice
Australia is also a good place to come.. we have a good number of south africans here
Well not to accurate. You can hire the same sort of manager in a small business if you create a strategy for them to stay and work with your business acquisition plan. You must be prepare to give some equity of your company to this manager. It will be more good for them if they know that you are going to buy other business related to the one you have for him/her managed and also give him/her some equity of those business or rise the salary. As you can see it can be done and there is thousands of great minds that will be willing to work with you. Strategy is the key here.
Have you done this? I've met many business owners who have tried to set up succession deals with managers to get them to 'buy in' and be more involved and take better care of the business. Almost all of them have walked away from vesting shares and other arrangements when they decided to go work somewhere else. I feel its hard sometimes for entrepreneurs to understand the motivations of people who want to be employees.
True. BUT-you will only see the ones where this strategy failed (hence selling it). Late response and no first hand knowledge but I’m pointing out the obvious. @@DavidCBarnett
I don’t see the problem with being in your business 10-20hrs/week.. you were going to work 40+ for someone else. Maybe it’s just me
There is no problem. You can do what you want. The video responds to the idea that it's easy to buy a business and have it run completely passively.
I'm sure those fights were fun "I have to slave here at the shop all day while you sit home and collect income!"
I don't remember collecting any income LOL. I was running my business brokerage full time in those years.
If you buy a business that isn't big enough to support a manger you really purchased yourself a full time job. If you buy a business that can support a manger you purchased a part time job.
Great context.
So what you are saying is that you never have done what the questioner was asking? Because that's what your story told me.
Chris buddy, do you need a hug man? I thought it was a great story.
From a revenue perspective what is considered a small business to you??
I don't think you can use revenue as a measure. For example, a fuel oil distributor with $20M in revenue and a 95% Cost of Goods Sold might only have a few employees and be very much a small business even though they have a large revenue. I prefer cash flow. Ie I call anything with under $500K of EBITDA a 'Main St. Business.'
David I emailed you
Yes, and I replied.
I have tho oil investment
How are things going since the price fell?
David Barnett a lot investors getting returns especially with this 3 oil drill package. Got an email?
If you re receiving passive income in this form... You wont be passive for long.
Yes, exactly my point! It's hard to own an operating business passively.
Gee What a downer story
That's how we live in the Pragmatic Zone!!! [Cue weird evil sci-fi music]
Moral of the story: Never involve your spouse in your business.
LOL! I've met a lot of spouses that work together. The divorce is always more complicated, however.
@@DavidCBarnett True. In my observation, top reasons for divorce: (1) Financial constraints or complications (2) Mother-in-Law (3) Couples' mental incongruence.
Assigning your wife to extra monetary responsibilities will kill a marriage for sure
Where to find baby boomers company with ten percent down
Hi, If you're looking for training on how to find a business then you should do my Business Buyer Advantage program and join the Adventure group coaching team. The whole Adventure team is focused on searching for businesses to buy. www.BusinessBuyerAdvantage.com
You look like Ted Cruz.
Ted Cruz looks like me. ;)
@@DavidCBarnett that’s what I always say!!
You talk like you didnt have combined finances with your wife... running it like roommates perhaps
There were many things kept separate because we had a marriage contract (aka pre-nup)