The #1 Asset Most Business Owners Forget About w/Guest David Barnett – 166

What do most business owners consider as their #1 asset?

Anything BUT their businesses!

Did you know that the more profitable your business, the more you could sell it for?

THIS could actually be your #1 asset…if you treat it that way.

Join Cash Flow Expert, Chris Miles, as he interviews David Barnett, about how to make your business more valuable so you can sell it. Tune in now!

David Barnett Bio:

David Barnett is a Business Valuation Specialist, a Business Transaction Specialist and a Business Finance Consultant. After a career in advertising sales, David started several businesses including a commercial debt brokerage. He’s one of the most knowledgeable guys about business out there!

David is a best-selling author, and regularly consults with professionals and banks on business and asset values. Presently he works as a private transaction advisor with people around the world who are buying or selling a business.

You can check him and his most recent media appearances out at www.davidcbarnett.com

Chris Miles Bio:

Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.

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Listen to the podcast here

 

The #1 Asset Most Business Owners Forget About w/Guest David Barnett

It’s a wonderful day for a wonderful episode you are going to love. As a reminder, check out our website, www.MoneyRipples.com and be sure to stay up to speed on events and blogs, and check out these other podcasts. A quick shout out to our sponsor, American Homeowner Preservation. If you want to make great returns on your money and make a difference in people’s lives by helping them stay in their homes or get out from under their homes, check out American Homeowner Preservation. Amazing returns for the money that you can get. The website is www.FundingAHP.com.

I want to talk about a particular investment or asset that is ignored constantly over and over. I remember there were many times when I have been coaching my clients that are business owners. I will ask them, “What have been some of your best investments?” especially as we are going through their financial situation. They will go through and might mention different things that they’ve done.

It usually revolves around money. They might say, “I don’t know if I have great investments. I have an IRA or a 401(k), 403(b), or an RRSP,” for a Canadian or whatever it might be. They will mention those things. They might even mention some real estate property or the home that they bought. Usually, the last on the list is their business. It usually ends up being the last thing they mention.

In fact, usually, I have to mention that it’s an asset and that’s our best investment. I will ask them, “Where’s the bulk of your cashflow coming from in your life?” “My business.” “Why didn’t you consider that as an investment?” Most times, they never do. That’s the thing. If you are a business owner, your number one investment should be your business. That’s why I’m excited to have David Barnett on the show.

David is somebody I was introduced to through a mutual friend. This show is exciting because it brings a missing niche that we’ve not talked about in this show ever, which is how do we make your business an asset? David lives out on the East Coast of Canada. It’s a beautiful place out there. He has been working with small and medium-sized businesses for over twenty years. Three of his books have become bestsellers.

The guy has managed and helped buy and sell small businesses all around the world, not to mention a father of two kids and a family man as well. What’s amazing is that this guy has got so much experience, especially if you want your business to be an asset. Have you ever considered how you are getting on your business? Have you ever considered you can make money in your business? That’s what David is bringing to the table. David, welcome to the show.

Thanks for having me on.

Tell our readers a little bit more about yourself. What led you down the path to be where you are?

If you want to get a fantastic payday out of your business, you must sell it to a strategic buyer. Click To Tweet

I have been a lifelong entrepreneur ever since I was a child. I had those traditional childhood businesses like delivering flyers and newspapers. It’s because I’m Canadian. I also had a snowblower business where I would clean every highway in the wintertime and mow a few lawns. I’ve always had my eye out for opportunities. I went to university and studied Business, thinking that it would teach me how to be a businessman, only to realize later that they were trying to teach me how to be a Fortune 500 bureaucrat.

I got out of that program and started working in advertising. I learned a lot about the different businesses that my customers had and what clients they were looking for. I got a feel for a lot of different businesses and their business models. I eventually left that advertising industry and started a business with a partner. A year and a half later, I sold it and then started another business. This time I was in commercial debt brokerage. I used to help people with operating leases, capital leases, lines of credit from the bank, and different forms of financing to help their businesses grow.

When the big financial crisis happened back in ‘07 and ‘08, a lot of the people that I was helping to secure money from the sources of capital ended up going out of business. I pivoted my business into a business brokerage. I joined up with an international business brokerage franchise brand. Over the course of the next few years, I sold 36 companies to other people and ended up leaving that because business brokerage was not a good business model for me. It’s based on real estate, where you list a business for sale. When you finally sell it, you get a commission from the seller.

What that means is that you can work a long time with no revenue, and then you have a deal close. Instead of being rich with all that commission money, you pay off your lines of credit and your credit cards and start again. After about three years, I decided to get out of that and have since discovered a whole new way to exploit the knowledge and experience I gained by being a private sales transaction advisor. I work with people around the world as a consultant. I helped them buy and sell businesses with or without brokers. I educate people on the topic.

Through my work in helping people sell their businesses, I also had to develop an expertise in helping to improve those businesses because some of them had serious problems. I told people that if they needed to sell, they were going to have to work with me for 1 year or 2 to make some serious changes to make their business a saleable asset. That’s what you want to talk about here.

Most of my readers here are in business. It’s a passion that they do. It’s not just for money. It’s their baby. At the same time, they are thinking more present term, short-term, how’s it creating cashflow and money for them now. A few people consider and have the viewpoint of what to do with your business as it grows. What do you do with it? What do you do to get out of it other than death?

Most people usually consider what’s to create the here and now but it’s either die or shut it down. It’s never, “This can be something that’s a real asset that could be sold for much more than what you’ve put into it. It can be a huge investment for you, not to mention that the cashflow is already kicking off.” Tell us more about that.

What I observe is that a lot of people get into business. They may have an idea or concept of what they want to do. They get into business. If they are successful in building up an income that they can comfortably live off of, then they start to get distracted. The business then is operating and producing a living for them. They work long, hard days. At the end of those days, they want to go to the beach or enjoy time with family and things like that lately, as we all do. Some of these businesses will stagnate for a long time. They won’t grow anymore. They will get stuck.

There are two kinds of buyers that buy businesses. There are what we call financial buyers and strategic buyers. Financial buyers are people who are looking to replace an income. They want to step into the shoes of the majority of small business owners. They are in a job that they don’t like, for example, or they have lost their job. They want to buy a business that they know how to run because they need an income.

If you have a business that isn’t formalized, you don’t have your org chart drawn out, and you don’t have roles, job descriptions, policies, and procedures. Basically, you are limited to selling your business to someone like you, someone who has a similar background, experience, industry, understanding, and knowledge. That person is going to look at your business, and they are going to immediately understand what’s going on because they have the same experience you do.

If you want to sell your business and get a fantastic payday out of it, you need to be able to create a business that can be sold to a strategic buyer. A strategic buyer is someone who may not necessarily come to work in the business. What they want to see is that they or someone they hire is going to be able to step into the business and operate it. It means they are going to have to see policies, procedures, processes, and things written down like you would find, for example, in a franchise business.

Most of us don’t have that, do we?

Yeah. Only a few. When I was a business broker and working with people to try to prepare their businesses for sale, I would tell them what they needed. I would give away a couple of copies of E-Myth by Michael Gerber to people. “Read this and do as he says.” I found it frustrating that people did not do what I was advising. They didn’t organize their business.

Why is that?

Back in those days, I believed that people existed along a continuum of intelligence and that there were smarter people and not-so-smart people. I was like, “How can we have these clearly intelligent people who are building these businesses and operating them?” They can’t see the wisdom of investing a little bit of time because it’s usually not money. It’s usually just time. Invest a little bit of time into creating this formalized organization because it’s going to bring all of these benefits.

It was only later that I realized through things like Myers-Briggs that there are sixteen different personality types. My personality type is one where I clearly see how these things are going to benefit people. I read E-Myth and figured it out. I did it for a business on my own. As I started to understand that some people aren’t suited to this, I asked, “How can I help people out?” I sat down and took a dose of my own medicine. I created a 12 plus 1 step process to organize and systematize a business.

By preparing a business to be sold, you end up with something easier to operate. This can make your problems lighter and the business more profitable. Click To Tweet

It begins with having a clear understanding of what you want your life to look like in ten years. We say, “What business has to exist to support this lifestyle, which allows us to create an org chart for the business that will exist in ten years? Step by step, we build things out. Not only do we get an organized business for the present but we have a built-in roadmap that’s going to lead us to the next decade where we want the business to go.

Anyone else is going to be able to come along and see exactly how the business is organized, how the different roles function with each other, who is responsible for what employees are able to be held accountable for their own tasks and responsibilities because everything is spelled out. The small business person can then do the things that big business seems to be able to do well like regular employee reviews and analyzing where the strangleholds are in the business or where the problems are with workflow. Many of the people that I’ve gone through this process with have started because they wanted to sell. Do you want to know what the number one reason is that people want to sell a small business?

What is that?

Burnout and fatigue. It’s the same reason why people leave jobs that they’ve run and operated on for 10 or 12 years. They get tired of it and decide they need to change. I mentioned earlier that the top reasons people sell a business are unplanned. The big reasons I always saw were burnout and fatigue, divorce, poor health, relocation, and finally, retirement, only one of those things you plan for. By preparing the business to be sold, you end up with a business that is easier to operate. By making it easier to operate, you find the problems more easily, and you can make it more profitable.

People came to me saying, “I want to sell my business.” I would take them through this 12-step process. By the time they got to the end, they had changed their mind. They would say, “Now that I’ve got things under control, I don’t need to sell the business.” That’s why I called the program, Build A Business That People Will Want to Buy because it’s all about making that business.

Once you’ve got it in the perfect form, you are the one that should buy it. You should hang on to it, run it, and earn your profits until the day comes when you have one of those pressing personal needs and need to sell it. You can take comfort in the fact that you are not going to be looking for someone like you. You can sell it to someone who may want to buy it as an investment, someone who has a similar business in another city that wants to expand geographically or someone in a complimentary business who sees that it makes sense to get into your industry.

There are more options when you are organized and have things down. There are more different buyers who could come along. This is the most important thing for sellers. The more buyers there are, the shorter the time to sell. Businesses are usually only sold when someone needs to sell. The timeframe is the most critical thing.

That’s the worst time to sell a business, isn’t it?

Yeah, it is. The longer somebody suffers as a business owner under one of those personal conditions that motivate them to sell, the more the business will erode. When someone is burntout and tired, they don’t return customer calls at 7:00 PM. They don’t chase down that guy they met at the cocktail party who said he might be interested. As the motivation level declines, the sales will decline, and then the cashflow will decline. The value of the business is based upon the cashflow. When this erosion begins, time is against the seller. You have to sell as fast as you can. If it’s always ready to be sold, then you reduce the riskiness of the asset.

To all you readers out there, I hope you are reading this. From working with several clients that have wanted to sell businesses, every single one of them was burntout. In fact, a few years ago, I remember I had a client here. She had a business that she was burning out from. She wanted to move to the next stage and was done. She was one of those people that paid themselves last. A big focus of our conversation was how we go to get herself and be paid first. It’s profitable versus paying her employees more than her. We are contractors but what happened?

I told her this too. I’ve seen this many times, “When you are selling, don’t emotionally sell before you sell the business. Don’t emotionally get to the point where you’ve already sold the business in your head, and you quit. You shut down.” She had a $60,000 valuation, and because she did still shut down, she ended up almost giving it away for $25,000 versus the $60,000 she could have got for it easily.

When you make the decision to sell and you start talking to buyers, one of the things I always caution people about is that it can take a long time. Sometimes you get to the eleventh hour, and the deal falls apart. One of the big problems that sellers face is that they have unrealistic or mismatched expectations. It’s always sad when I get contacted by someone who’s looking for help to sell a business.

I start working with them and doing the evaluation work. I come back and tell them what it’s worth. I tell them what the likely terms of sale will be. I will say, “Here’s the offer you can expect.” I will explain that to them, and they will say, “Somebody offered me that.” They didn’t know that what had been offered to them was a reasonable offer. A lot of that has to do with a lot of the misinformation that’s out there. The fact that there are people who are involving themselves in business sale transactions who are not qualified.

I see a lot of the lower end of the market where people like real estate agents will get involved in selling businesses, even accountants who don’t work a lot in transactions will try to get involved in a business, buy or sell transaction, or a lawyer. They are not creating the proper expectations in the mind of the seller. When they get what I call the reasonable buyer and the reasonable buyer is the person who has money in the bank, good credit experience, and the person that the bank is going to be willing to finance. When that person comes along, they can’t have a reasonable conversation with the seller because the seller is on the wrong page. Either they think the business is worth way too much or they are not willing to have a discussion about the terms of sale.

That brings up a great question. Valuations vary depending on the industry. I get that but as a rule of thumb. What could people expect to try to sell a business for based on valuations?

I will do a great little exercise with you. How about this? You can’t see it but, in my office, there is a box. If I were to tell you that this box was magical and that every year on New Year’s Eve, a $100 bill appeared in the box. Without fail, for the last several years, a $100 bill appeared in that box. We know it’s a pretty sure thing. If I told you I was hard up for money because I needed to get my roof fixed and I was willing for the first time ever to sell the magical box, what would you be willing to pay for it?

People sell a small business because of burnout and fatigue. They get tired of operating something for years, so they decide to go for a change. Click To Tweet

For me, at least a few hundred dollars because I want that money back as soon as possible.

Would you pay me $1,000?

Probably not. $500, maybe.

You would be willing to pay me $500. If you were willing to pay me $1,000, what you would be telling me is that a 10% rate of return was satisfactory for you. At $500, you are telling me you need 20%. That example, that magical box is something like a government bond or a real estate investment. We know that there’s going to be a certainty of that cashflow. If next door to my magical box that produces $100 a year without fail, I have a magical jar. The magical jar is a little bit different. Every year on January the 1st, there can be $20 in there or $100, and sometimes there has been no money in there. Once I misplaced the $20 bill, and I think the jar ate it.

We are talking about something with a great degree of uncertainty. The cashflow goes up. It goes down. It’s all over the place. If I wanted to sell that jar and told you that last year it produced $50, and the year before that it produced $55, I would probably have a hard time selling it for more than $100 to $150. Someone might be willing to take the chance that it’s going to continue to behave the same way for a year or 2, maybe 3 but no one is going to take the chance that it’s going to keep behaving the same way for ten years.

When you start to think along those types of lines, you start to realize that most people are not going to pay more than a couple of times the cashflow for business. We have this romantic notion in our society that entrepreneurs are going to build these businesses. They are going to be sold for the types of valuations that you see in Silicon Valley, where people are paying hundreds or thousands of times the annual profits, if there are any at all, of these companies.

The reality is that small businesses generally sell for as low as one time the cashflow to a high of 3 to 3 and a half times depending on the industry. You are right. It varies greatly by industry because not only is the cashflow important but the riskiness of the cashflow. That’s why, for example, restaurants sell for a lower multiple of earnings than a septic pumping company. The septic pumping company has a more stable, regular cashflow, which is brought to it by the fact that that industry has greater barriers to entry.

When I do valuations for clients, I have access to databases of past sale transactions or I can look up other businesses of similar size in the same industries. I can see what other people have paid for those businesses. What it does for me is it gives me a reflection of the risks that those other people perceived, which we can assume a reasonable buyer is going to see in the subject business.

I’ve dealt with a lot of chiropractors, and it’s common for them to sell pretty much for about one time their profit. When you say cashflow, you say cashflow as I do. Cashflow doesn’t mean total revenue like total money the business made. It’s what’s left over after you’ve paid all their expenses.

Generally, I use what it’s called the seller’s discretionary earnings, which are the profits of the business and the wages or salary of the owner-manager. It’s the money available for the owner to do with as they wish. When you own a business, you get to decide how much your paycheck is going to be. You could choose to have zero profit in your company simply by taking all the money personally, which a lot of people do.

There’s nothing wrong with that. It’s completely up to you what you do. When we want to compare one company versus another, we have to give back to an apples-to-apples comparison. We do a normalization. For example, I would add back the actual wages of the owner into the profit of the company. I would then subtract a fair market wage from what a stranger would be paid to do that work.

You talked about paying yourself first and gave the example of the woman who paid herself last. One of the things that I do when I do this normalization is I find that a lot of small business people are underpaying themselves for the work that they do. When I meet someone who is a manager of a million-dollar business, and I find that they are paying themselves $50,000 a year, I will say, “What would you have to pay someone else to do your work if you had to hire a stranger?”

They will tell me, “I could hire someone like me for $80,000 or $85,000.” What that means is that they are subsidizing the operations of the business by donating free labor. When we do that normalization, I add back the $50,000 and then take away the $85,000. A lot of the time, I end up with businesses that are not making money at all. They are losing money. People are lying to themselves by not dealing with themselves fairly and paying themselves a fair market salary.

It’s interesting. When I sit down and go through these exercises with people, it’s one of the things that motivates people to say, “I need to make a change. I can’t keep pretending to be an entrepreneur. I have to build a business that works for me and my family and build something that’s going to pay me what I would earn working for somebody else, and then build a profit after that.” Once you get to that point where you are paying yourself fairly, and there’s a profit leftover after that, then you’ve got something that someone else is going to want to put money down the table to acquire.”

Give us one story of a great client you had. They weren’t doing anything, and then they tried to switch it around and get to the place where they could sell a business or maybe even did. What’s an example of a client where you were able to help them do that?

I have a client who has a sign shop and have been taking them through this process. They aren’t quite finished. What happens is they get busy, set it aside, come back, and work on it some more. They have gone from a shop doing about $300,000 in sales with three owners who spent all their time working in the business. After three years of working with me, they are doing almost $800,000 a year. They have eight people on staff. Not only are they paying themselves a fair wage but earning a profit on top of that. A lot of the issues that they have dealt with have come from the analysis, the planning, and everything that comes in as part of the 12-step program.

Restaurants sell for lower earnings than a septic pumping company because the latter has a more stable and regular cashflow. Click To Tweet

It makes them a real business. You are working on the business, not having to work in the business so much, too.

When I created the 12 steps, my goal was to create a process. That was number one, easy. There’s no one step that is difficult. You have to sit down and do it. Systematizing a business, you can say that to someone but then if they sit down with a piece of paper in front of them or a computer, and you say, “Systematize your business,” it becomes a daunting task. It’s complex. You don’t know where to start. By breaking it down step by step, “Do this, then do this,” I make it easier.

Number 1) It has to be easy. Number 2) It couldn’t take a lot of time. Many people have taken their business through this process in under a year. They’ve done it by investing a couple of hours a month. That’s all it takes. Number 3) I had to be able to show people results quickly. By the time people get to step 3 or 4, they are seeing things they have never noticed before in their business. They usually start to make changes at that point to improve themselves. We haven’t even gotten halfway through the program where people start to see things that they need to change.

What’s one simple thing that any entrepreneur can start doing looking for that beginning step? What could they do now?

The very first thing that I would tell someone if they don’t feel they have plenty of time or the energy to do any of this stuff, number one, “Think about the journey of their customer. Imagine who is out there that is my customer? What are they thinking about when they decide they need something from a person like me? What is the journey they take to get from A to B to find me?” I find that when we start to work on the workflows, the marketing, and the customer acquisition, this is always one of the problems that almost every business has. Here’s the thing. Business owners are usually thinking about themselves, not thinking about the journey that their customers are going on.

Let me give you an example. I used to travel for business when I had a job. I had a corporate credit card for expenses. It was an American Express card. Many of the small business readers out there will know that American Express cards often cost more to accept than Visa and MasterCard. I would go into small towns often and look for a place to eat. People would say, “We don’t take American Express.” Why would a business person not take American Express? It’s because they say it costs too much. What’s the difference in costs? Typically, it might be 1% more. On a purchase of $10, you are talking about a dime.

I walk into a restaurant and say, “Do you take American Express?” They say, “No.” What they are saying is, “Your business is not worth a dime to me.” What they are not considering is this. When I was a business traveler and put a meal on my American Express card given to me by my employer, at the end of the month, all I had to do was check a few boxes to reconcile that expense. My meal was covered.

If they didn’t take American Express, what I had to do was pay with my own money for that meal, keep the receipt, take it back to my home office, fill out an expense requisition, attach the receipt, scan it all, email it into the accounting department then wait. It usually didn’t come to me on the next paycheck but the paycheck after. I’m waiting typically three weeks to get my money back. I have to take that money and put it on my own credit card that I use. Why would I ever choose to do that? I never would, would I?

I explained this to a woman who owned a pizza restaurant in a small town. I said, “This is everything that happens to me because you don’t take American Express.” She said, “We don’t get many business travelers anyway.” Of course, she doesn’t. Why would anyone willingly put themselves through that? That’s what I mean when I talk about the customer journey. You think about all aspects of the process, from the time someone is going to decide that they need to patronize a business like yours right through until the time they are done. You think about all aspects of the transaction.

The problem is that restaurant tourists, for example, are usually chefs. They are thinking about the food but the decor, the ambiance, the hours, the outdoor lighting, the way that you accept to be paid, and all of these things are part of the experience that the customer enjoys. If you have the greatest food on Earth and you decide that you are only going to accept cash, you will not be satisfying the needs of many of the people who may want to be your customer.

What’s so cool here in this example is that not only do you increase your cashflow but every time you increase your profit and business, you increase the value of the business, too. The investment gets better. That’s what’s so beautiful about this.

If you fix your business and add $10,000 to the bottom line, you could be adding $20,000 to $30,000 to the value of your business.

It’s a multiplier. There are a few investments you see the value go up and your payout get up, which is awesome.

You get paid to wait because you enjoy that extra money now.

David, I appreciate it. This has been awesome. What could people do if they want to follow you to know about your stuff more?

The easiest thing to do is go over to my blog site, DavidCBarnett.com. I’ve got hundreds of blog posts. I have a YouTube channel with hundreds of videos on it. There’s an email list they can sign up to. Every week, I send out a new video, which is normally based on a question that someone has submitted. For anyone who wants to play catch up, the YouTube playlist for videos on buying and selling businesses is about 100 videos long. I keep adding more every week. On my blog site, you can learn more about the course I talked about, Build A Business That People Will Want to Buy. You can see all of my books and everything else that I do there as well.

Thanks so much for your time, David. This has been awesome. I got a lot of value from this. I’m sure everybody else did, too. Thank you so much.

No problem. Have a great day.

You, too. Everybody else, thank you for reading and be sure to join us next episode. Go and make a great and prosperous week. We will see you.

Important Links

• www.FundingAHP.com
• David Barnett
• E-Myth
• Build A Business That People Will Want to Buy
• YouTube – David C Barnett Small Business and Deal Making SME
• Email list