Ep 354: Why Most Acquisition Dreams Die – And How to Build One That Survives with David Barnett

Why do some people win big in acquisitions, and most people just don't? Hi, I'm Jaryd Krause. I'm the host of the Buying Online Businesses podcast, and today I'm with C. Barnett.

He's a seasoned business broker, advisor, and educator who's helped aspiring entrepreneurs buy and sell small to mid-sized businesses since 2009. He's the founder of the Business Buy Advantage program, a comprehensive training system that guides buyers through finding, analyzing, and offering or making offers on deals, financing them, and integrating that business into their life.

And David's background includes business valuations, deal structuring, and a passion for helping people escape that nine-to-five by acquiring cash-flowing businesses. And in this pod, I speak with David and have a great dialogue and discussion around why so many people fail when it comes to acquiring a business, and what are the things that get in the way, and what's the difference between people that fail and people that just crush it and win big and have a great acquisition.

We talk about reframes, how to reframe a bunch of things that happen to us throughout our acquisition journey to look at them as a positive sign, not a negative sign, and how it can add to a notch on our belt to us achieving a great acquisition versus us giving up and running away.

We also talk about how big emotions are when it comes to acquiring a business and why most people look at buying a dream. They go into dream mode, put the blinkers on, and miss so many things. David shares a great example of this, of where people have failed with acquisitions.

And then we also share examples of why people have actually succeeded. There are so many things that we list that can happen throughout an acquisition that cause people to fail, run away, and just struggle through the process and give up. And then we talk about some mindset tweaks and some major success blockers.

And this is such a valuable podcast episode. The mindset that you need to have to acquire a business is everything. You're not just the finances; that's come secondary, not just the ability to do it and the knowledge to do it, it's all come secondary to mindset. Of course, we talk about buying businesses.

If you haven't got my due diligence framework, make sure you get it, buyingonlinebusiness.com, for just free resources. It takes the guesswork out of buying businesses. It's made people millions and millions of dollars and saved people millions and millions of dollars from using this free tool. You should get it. Let's join the pod, enjoy.

David, welcome back to the pod.

Hey, it's been a while. Good to see you again.

It's so good to chat. So good to see you. So good to have you back on. It has been a while. Everybody listening, David's been on the pod multiple times, probably five, four or five times. Just type his name on the website, and type his name plus my name, and you'll find a bunch of stuff.

I've been on yours a couple of times as well, actually. It's so fun. And I was just thinking about you, and we hadn't chatted in so long. I was like, you know what? You're the guy I want to talk to about. What? Cause you've been doing this since what?

2009. Yeah.

In 2008, I first started with the original business brokerage office that I joined. And I was there for a year and a half before I bought the office. And then I ran it for three years. And then I threw up my hands and left the industry for four and a half years. For four and a half years, I became a banker.

And then, when the bank was offering bio packages, I took one, and I used it to start a consulting business, which I currently run, which has been about 11 years now that I've been doing this, where we still help people buy and sell businesses, but we use a consulting model instead of a brokerage model.

It's great because our cash flow is smoother. That's number one. Number two, number two, though, it means we're no longer conflicted with buyers' interests. So business brokers get paid when a business is sold.

And so if you need someone to buy a business you have for sale to eat, you're only going to tell them the good things. It's like I always say, if you complain to a car dealer that you're having trouble getting around town, they're not going to tell you to buy a bus pass.

Exactly. Yeah, and yeah, that's why I want to chat to you. You've been doing this for so long, even before you started consulting, what, 11 years ago now. I just really want to bring this topic of discussion up because there are so many people that I see who come and talk to me, and they're on the pod, and people hear their stories about how successful their acquisition was.

What they're doing now and how the business is growing. And then there are a lot of people behind the scenes who are trying to buy a business, and things just get in the way. And it's a difficult journey to buy a business.

As it is, it is a shortcut to generating an income because you're buying something that's already earning an income, versus building something for sure. Just because of that shortcut doesn't mean it's easy, you know?

So yeah, I just wanted to have some dialogue around what you see the differences between somebody that's quite successful in the acquisitions and the journey to getting to the acquisition versus somebody that has a bit more trouble.

Yeah, sure. So I think that one of the big problems is that people believe that conducting a successful search and buying a business are the same thing, and they're not. So, so here's why, why I'll say that is buying a business just means you do a transaction and anyone can go on to anyone can go on to any of the online platforms and pay an inflated price for a crappy business and they can do a deal and they can buy a business, but that won't be a successful search because they'll probably won't cashflow or whatever.

And, when people decide I'm going to explore this and I'm going to go look for a business to buy, they think that the transaction is the successful outcome of the search, and it isn't. The successful outcome is to buy the right business for you at a price that makes sense under terms and conditions that cashflow properly so you can make money and be successful.

That's the actual outcome. But I would expand the definition of a successful search to include something else, which is avoiding all the landmines and keeping your money because of insanity. Because I've worked with many people over the course of the years who have spent years trying to get the right deal together, and every time they look at a business, or they get into the weeds, and they do the due diligence, they find these problems.

And then they're disappointed that it didn't work out instead of celebrating the fact that they avoided a landmine. Right. Because yeah, if they did not find the problem and they had done the deal, then they would have ended up in trouble. And they would have ended up being an unfortunate circumstance of someone who failed in business and lost their money and ended up, and maybe had personal guarantees on debts that, you know, created all kinds of other repercussions for them.

And so when you expand the definition of success to include avoiding bad businesses, it means that you can search for a business for a long time. And if you avoid all the bad deals and still have your money, you're still successfully doing it. It just gets frustrating because in people's minds, success is doing the acquisition.

And, you know, some people do acquisitions and then don't succeed. Small businesses are one of the riskiest asset classes that there are. It's a risky kind of thing in that it's not just up to you.

People like to subscribe to this idea that, you know, this rugged individualist idea that I own the business, I'm in charge, I make the decisions. But the reality is, that you need a never-ending flow of customers that want to do business with you.

And if something happens to disrupt those people, we've got inflation in food and fuel, right? So if people have to pay more at the grocery store and more for fuel, they probably have to cut something else out of their budget.

So if your business is selling anything of a discretionary nature, the customer pool could shrink, and it's got nothing to do with you, your product, the way you deliver it, the service, et cetera. It's just, they've got to pay more at the grocery store. So something else has to give.

And then there's, you know, a whole slew of other things, you know, government rules could change. You see, we've had a whole bunch of people impacted by things like trade tariffs between countries recently. You see, I've known people in real-world businesses like restaurants who, unfortunately, have failed when a city decided to tear up the street for an entire summer to replace sewer pipes.

And that was the busiest time of year for the restaurant. And so, these things we don't control. And when you start to look at all of those things, like you know, in the world of investing, they use that term black swan event, like the thing that isn't foreseen.

And if you go and talk with someone who's been in business for like 20 or 30 years about really unfortunate, unforeseen things, and they start to tell you their stories, what you realize is that there's one of these things every two years, like of one degree or another coming at them. It's all of a sudden you realize it's not such an irregular thing to have an unforeseen difficult circumstance come in and have to be dealt with.

Yeah, wow, there's so much to unpack in that. I definitely see that somebody successful in making it to a successful acquisition is somebody who can go through those multiple black swan events regularly and take many hits financially, emotionally, and in business, and have the fortitude to realize that this is going to happen again and again and again.

If I want to be in business, I need to be able to make it through these. And the first few are the toughest for sure, right? Because that's when you're, I would say you, it's like when you're first going to the gym, you're starting to do your first few sessions, and it's tough to recover from.

But once you know, and you're doing this regularly, you can recover a lot faster from those certain things. And that can happen on the search site as well, where you're looking for things, and you get really close, and then you realize, okay, this business comes with this type of liability or this type of risk that I'm not willing to sacrifice on.

And, the mindset might be that you've missed out on a deal, but you've just saved, as you said, you've saved a lot of money. And I think what we're going to be talking about mostly in this pod is what I was having discussions with over dinner with friends last night is reframes.

How do you share this very valuable reframe that you haven't missed out on a business, and you haven't failed? You've actually won by walking away from it, which is harder to do than just going, okay, we're so close. We've already got, you know, we're already half bought in. You've spent money on due diligence and legals and whatnot.

And you just continue to go through, like the harder thing is to say, I've got to stand my ground here, stick with my values, acquisition criteria, and walk away. It really is about reframes, right? And how you perceive where you're at.

Yeah, I would agree. And another frustrating situation that people get into is that they will find a good business, which is meeting all their criteria and is profitable, et cetera. But they'll find themselves in a competitive situation where there's another buyer who is also making offers. And whenever I have a client in that situation, I always say like, Okay, we have to figure out what you can reasonably pay for this business and make the fairest offer that you can.

But you've got to do a cash flow forecast. You have to figure out what the performance of the business should be, assuming what we can control. So what can we control? We can control, you know, the expenses.

We can control how it's managed. We can't control what the sales are going to be next year. So, one of the places where I see people get into problems is when they factor in some kind of growth in the business.

And they'll basically make an offer that only works if the business grows and becomes more profitable in the future. And as soon as you do that, as soon as you do that, what you're doing is you're paying the seller for the work that you need to do to execute that growth. Which I don't think makes sense.

Right, you're paying more for the business with the expectation that it's going to perform in that certain way. And as you said, you've got these external environmental things that can happen economically that can be against you for that to actually happen.

I also see it in a way that when you do that, you inflate the price based on financial projections. You're just projecting that this could be a possibility of achieving that result.

A lot of the good acquisitions that people buy is they're undervalued for the business. Yeah. They're in the business and miss out on that, that, that value piece of, okay, we bought it for a little bit under value and we've got room for error here. Whereas you're like making up room for error by using financial projections for an inflated price to be minimal, if not.

Well, I agree that you need to pay a price that is probably a little bit less than the value you see in the business. And I think this is a book, a page you need to take out of the book of the people who flip houses.

You know, they'll tell you, make money when you buy, right? If you find the house at the right price and you factor in your renovations and you know, you can sell for a profit, you're going to be okay.

But the buying price is the key thing. So when my client's competing with someone, and I'll say like, Just figure out what you can afford to pay that makes sense for you. And then the other person comes in and offers like 20 % more.

It's like the reframe in that scenario is that you have to let other people make stupid deals. That way they're not, they're, they're not going to compete with you on the next one.

Right, and the other thing is that we don't necessarily always understand who the other buyer is or why the business might be worth more to them.

Or if they have some other kind of nefarious motivation. So I'll give you an example. You know, I'm typically dealing with main street-sized businesses. So these are businesses with cash flows to the owner of like half a million or $700,000.

And private equity groups have been dipping down more and more into my territory. And, so if a private equity group is buying a business that's on a little bit of a smaller size for them, you know, why are they doing it?

And part of understanding some of the deals that those guys do is understanding how they get paid. So these guys will gather up money from wealthy investors, and they'll also borrow money. And they've got this commitment of funds, but they don't actually earn money as administrators of this money until they deploy the capital.

And so when you start to understand how these funds work and how these guys get paid, you realize that they actually have an incentive to maybe overpay for a business because it means now the funds have gone, they've been, they've been applied to deployed to buy a business.

Now they can start to charge their, I think they call it carried interest, every month or year or whatever. And so, you know, and then they tell their investors we're doing well, we just bought another business.

It isn't until some point in the future, when they try to exit that acquisition, that it will then be revealed whether they did or did not do a good deal. And it's tough to compete against someone who has that kind of motivation and access to money at really low cost of capital, cetera.

So there's nothing a buyer can do if you're competing against that kind of scenario. And you just have to accept that and go looking for a deal, maybe where you're not going to compete with someone else like that.

Yeah, I totally agree. Just last week, we had this exact scenario happen. I believe it was two private equity firms getting into a bidding war. The deal was roughly around seven mil. We offered slightly less than the asking price. Well, we offered a fair bit less than the asking price.

We were willing to negotiate a little bit higher, but they were at the asking price and above two other buyers and for the multiple, for the type of business model and the level of risk in the deal, I didn't see that it would be worth that for my clients, but maybe for a private equity firm that has another business in that retail space or something like that.

There's another factor, and they can; it's more valuable to them to acquire than say an individual that doesn't have any other assets that could lend to that acquisition. So there's that part as well.

And the reframe that we're talking about here is that it's a win that we didn't get into a bidding war with the private equity firm that can value this business significantly higher, which means they're going to have to work a lot harder to be able to recoup the value through the position.

And here's the opportunity in these scenarios, too, because I've counseled more than one buyer when they lose out on a deal like this to wait six or 12 months and then go meet the new owner.

Because if you really liked that business and you think that the other buyer you were competing against made a mistake in doing the deal that they did, you now know there's a really great business, which now potentially is overleveraged, which might be a little strained financially, which could have some degree of difficulty.

And if you really liked that business, there's probably some kind of match between yourself and your own skills and that business. So go meet that person, that new owner, six or 12 months later, and let them know that you were one of the bidders and you were interested in the business.

And if they ever decide they want to get out, then they should give you a call. And you never know what could happen. You could end up being able to still do a deal in that business as the next buyer.

Absolutely. Absolutely. And even the opportunity in it when you put an offer through that is under what other people are paying. If you just mentioned to the seller or the broker that, like, this is where we're at.

If anything does happen or fall through on their end, like we're open to discuss, but maybe not at that, that higher price, this is where we sit. So you leave the door open. You don't completely shut it. Let's talk about what you mentioned before.

There's more to unpack around somebody who's looking at a deal or has been searching for years, and they find something, and they realize they have to walk away. I want to talk about time.

Mentioned years, they've been searching for something for years. Where I see a lot of people struggle is they will listen to a podcast with one of your clients, and you bought a business within a year or six months, or with same with me. Right. And here, these case studies of people who have achieved these excellent results.

And they put this time figure on that I'm going to buy a business by this time. And they set a goalpost, and that goalpost where they're at, where they're coming from, and operating from in their own life is not realistically achievable based on how much time, resources, or financial resources they have.

For example, maybe they have two more kids than this other person and a full-time job, and this other person they heard this story of doesn't have a full-time job and doesn't have kids at all.

They set this unrealistic expectation that they can go away and achieve this, and when they get to that certain point, they feel like a failure, and they walk away from the whole venture altogether.

Whereas they had it as stuck in for the next couple of months, they may have found something that would have been a life-changing acquisition. Do you see a lot of people who make this mistake, and how do you, what sort of advice do you share with people like that who set a time expectation on a search?

Yeah. So what is, what is the SMART goal? What does that stand for again? What's specific, measurable, attainable, is R stands for? Realistic. And time, time-bound, I think. Right. So, here's the problem with setting a goal that I'm going to buy a business in, you know, 180 days or something like that. Is it that you don't control whether someone's going to sell you a business?

Right? It's the owner's property, and their property rights dictate that they get to choose if they're going to sell it for what price, et cetera. So you can't control that. All you can do when you're trying to buy a business is make offers that make sense to you, that people may choose to participate in. And I often draw the analogy between buying a business and being a salesperson. And what you are selling is an opportunity to exit.

So you have to find the right prospects, as a salesperson might, who you think need what it is you're selling, people who might want to sell their business. But there's got to be a fit between the business and yourself as the buyer, to make the exit path work.

And like any salesperson out there, you propose things to people, like here's the thing and here's the price, et cetera. But ultimately, the other party has to agree. And so just like a salesperson, you can't make a goal to sell so many widgets in a year, but what you can do is you can make a goal to, you know, do five cold calls a week or send out so many letters or do so many interactions with brokers.

And those things you very much do control. And that's, that's typically where I steer people, is I steer them towards making goals around things they do control. You know, you can research businesses online can try to find their owners on LinkedIn, and send out connection requests.

You can mail letters in the post. Like, there are all kinds of things you can do that you can control. And you know, what often happens is the people who go through the work and have the discipline to follow through on those actions usually end up with deals in the pipeline.

Because the more conversations you're having with people who might prospectively want to exit and sell their business to you, the more opportunities you're going to have to talk to those people. And then there are the further knock-on effects that we don't consider. I run a coaching program, as you do, for people who want to buy businesses.

And one of the things that has happened more than once is that people will reach out to business owners about potentially acquiring their business. And then, a month later,h later that no deal will happen between the two.

But the person they reached out to will end up connecting them with someone else because they were at some kind of industry association or something, and they'll say, Oh, you want to sell your business? I had a guy call me a month ago. He might be a good fit for you.

And all of a sudden, this connection is made because of the effort that was made to try to build that network and go talk to owners. And, you know, there's, and there's, there's two pathways. People can go down to try to buy a business.

They can go to the websites where things are listed for sale, or they can try to create an organic networking type of situation where they meet these people and then start talking with them about doing a deal.

And I, I usually counsel people to go down both paths at the same time. You know, there are different opportunities down each path, but the more you make an effort to actually have conversations with people and businesses done between people, you have to have a dialogue with another person.

The bigger problem I find is not that people set artificial timelines, is that people think that they can do this from behind a computer screen. And I mean that metaphorically, because obviously, if you're going to talk to someone in a faraway place, you might do it through a Zoom call.

But that is still a person-to-person communication where you're actually having a conversation with someone. You've got to get to the conversational level. It cannot stay, you know, emails and all these sorts of virtual communications. People, I think, want to be able to buy a business the way they order something off Amazon.

And you have to get into this space of conversations. The other thing that I think is really important to point out is that when you hear two people on a podcast talking about an acquisition, for example, you are hearing a story told from the point of view of somebody who's gone through it and all they can share is their own experience from what they've been through and what they understand at that moment in time.

And I have listened after being in this business for as long as I have, I have listened to those types of stories on podcasts where people will talk about the cash flow, they'll talk about the multiple they paid, they'll talk about the type of business they have, and the type of equipment that they're operating.

This person has terribly overpaid for this business, and it's going to be two or three years before they realize it. Because what they've signed up for is they signed up to pay over 10 years for a business, and in two or three years, they're going to have to start replacing trucks, and they're going to be buying new trucks while they're still paying for the old trucks. This person has bought a business based on EBITDA, and they haven't considered the capital expenditure required for this business.

At the moment in time they're being interviewed, they're on this high. They think that everything is great. They're very happy. They're exuberant because they've been through this deal and they think that they've done something correctly. It's only later that they're going to find out they haven't.

And if the business grows, then maybe it will smooth over those things. But also, if the business grows and they don't have a plan to increase the operating capital, if it's a business that requires more operating capital when they grow, then they can also grow themselves into a weakened position, too.

I hear these same stories that everyone else hears, and sometimes they're happy to share a story that is not actually a good story, but they just don't realize it yet. So, and, you know, there was, there was one actually, a young lady talked about her acquisition, her and her husband bought a business in like 90 days, things didn't go that well.

And I did a breakdown of that story on my podcast one day, where I made a video, and I kind of broke down her story step by step, and I explained all the different places that she made a mistake.

And what was really unfortunate about the situation is that she was an experienced business owner, but she bought something in a radically different kind of business that had different aspects that she wasn't used to. So she had a service business background, but she bought something that was in a business that had inventory.

They had, you know, cost of goods sold, certain features of business that she wasn't that familiar with. And so she failed to take a lot of these things into account and overpaid for the business. Once you know, overpaying, think is one of the biggest mistakes that people make, especially when they're using leverage, especially when you're using a high degree of leverage.

Yeah, when you're using a 10 to 20 % down, it's a massive mistake. I think the biggest thing here is like, yeah, as you mentioned, the control thing is you should work, focus on what you control, and not get frustrated with what you can't control.

You can't control how many deals come on the market in a certain period of time. But what you can control is like your buying criteria, and you can be a little bit more flexible, don't open it up too much that you go out and buy something with a high amount of leverage that has some level of operational complexity, like you're mentioning in the story that you don't understand. Like that's a massive mistake is to buy a business that doesn't make sense to you and thinking that you can run it and do it yourself.

One of the key concepts I think is important for people to understand is that you want to be in a situation where time makes you stronger. So, let me give you an example. Okay. You've got money in the bank, but you become unemployed, and now you have no money coming in to pay your bills. And so you decide I'm going to buy a business. That's how I'm going to get an income. But every month that goes by, you have less money to invest.

These are the people that I don't work with.

Cause this i this is the worst position you can be in, because now you need a deal. Right. And, because every month that goes by, you have less money because of your living expenses, you become more and more compulsive, and that compulsiveness is going to encourage you to overlook things.

And if you don't have enough deals to look at, you're going to feel frustrated, and you're going to just grab the one that looks the best. And so that's like the weakest hand to be playing.

A stronger hand to be playing would be someone searching for a business who has an income that they can live on, and every month they save a little bit of money. And so this person, over the course of time, because of a stronger and stronger net worth, becomes more and more able to buy a business as time goes on.

But the people who have the strongest hand are actually other businesses. Because if you're operating a profitable business and you're making money every month, then you don't need to do any deals. Right?

And I see this time and again, where, you know, the, the, the, business that's already profitable, that's growing its balance sheet every month, it's strengthening, paying down its debts, et cetera. They're the ones who, as time goes on, have a stronger and stronger hand to go and do acquisitions.

And, you know, where are you in that spectrum? Right. I will often ask people who are employed, you know, how much extra are you saving every month, and a lot of them are just kind of living check to check. They're not really improving their financial status from one month to the next.

I think it's really important if you're going to run a business to be able to show a banker that you can run a household. And the way that we express profitability in a household is through a term that starts with S. It's called savings.

So if you have a certain income and a certain outflow in your household, any surplus is savings, right? So if you can show that you can profitably operate your household and save money every month and grow your personal balance sheet, and become a stronger and stronger hand, it's going to create more and more opportunities for you.

And when deals that you are attracted to, you know, slip away because of another buyer, or you find something that you realize isn't such a good deal. That just means you're going to keep getting stronger. Time's on your side.

Exactly.

Yeah, you've got more experience, and you've looked at more deals, understand more deals, and you're getting stronger by understanding the value of this. Like if you're looking at one particular type of business model at that price range, you then get to know the market better.

And when the right thing pops up, you know the valuation, and you're not going to overpay because you've looked at so many deals or maybe missed out on a couple of deals. You are making your position so much stronger. And all these things that we're talking about here, it like working out how to save, not trying to buy something in a short period of time, and you're creating your position to be a lot stronger.

It's removing emotion from the acquisition versus using emotion to drive, drive an acquisition. You know, I call that the, you know, the leaky bucket syndrome, what you're talking about in the savings is like, if you have a household where money is leaking, leaking through the cracks that you don't know existing to enter attainment expenses that aren't absolutely necessary, subscriptions that you've forgotten about, things that you're paying for that you don't realize how expensive it is, and you're not tracking it.

And then you just start, even if you start earning more money in your job, that money's just gonna keep falling out. What financial is gonna give you money to put into that bucket when they know that there's leaks coming out of it versus you fixing that leaky bucket syndrome?

And of course you're to be more emotional and more erratic when you don't understand and have control over your finances because you want to have control and you want to achieve this thing but you haven't fixed something that's going to allow you to build be the platform you build upon. Right?

So that's just one notch on your belt and making your strongest savings, fixing your leaky bucket, your household income. That puts you into a stronger position that allows you to do a longer search. if anything, a longer search, like it's a really good reframe, a longer search, if we're just counting time, gives you more experience in looking at deals that allows you to have a better understanding of the valuation of those types of businesses at that range for that market, right?

It's, you know, the word you just used in motion, I think is a really good one that I think we should, we should unpack a little bit here. I learned is the biggest one that gets in the way.

Well, I learned years ago back when I took some marketing courses in university that, you know, all purchases basically have some kind of emotional element to them. And, and I think that's true.

And I think that it's important for people to maybe reflect on their motivations. Why is it that you are looking to buy a business? know, people will focus on the tangibles. They'll say, I want to, you know, have more income. I want to have more money, et cetera.

I've found in my career that very few people are truly motivated by that. It usually has something to do with self-actualization. You know, people feel that they want to level up to achieve some higher status, maybe, or be able to put like a notch on their belt, like an accomplishment of being able to run and grow a business. And I think it's really important to understand what factors, emotional factors, maybe are driving you to want to do a deal.

I've noticed that I've got two really consistent groups of business buyers that I work with. New immigrants to a country. So this is a group of people who may be professional people, very experienced, but their professional credentials may not be recognized in the new country.

So, they come into the new country, and they need to earn an income, but they can't operate as, I don't know, an engineer or something. Right. And so that person's motivation, their emotions are about supporting their family and being the provider, and all this kind of thing.

And what that person is probably gonna wanna do is find some kind of business that might be able to leverage their engineering background and understanding, even though they're not operating as an engineer anymore, know, maybe being involved in some way in building trades is gonna take advantage of what they know, right?

So that's one kind of buyer that I've seen quite often. The second kind of buyer is a very different group. These are usually middle-aged middle managers from bigger companies who feel frustrated that they haven't been able to progress in their career as quickly as they might want to.

And they begin to realize that the only way that they're going to be able to get those top-most positions is by stepping out of the big company and going and doing their own thing.

And oftentimes people are leaving really well-paid positions with great benefits and lots of vacation time and great pension plans, and you know, the support and sponsorship of big Fortune 500 companies that are not going anywhere. And they're willing to trade it all to buy some small business that they're going to be entirely responsible for.

They're notching up the risk in their life tremendously, but to them, it makes perfect sense because they want to achieve these other different things. I think what's, and I don't think there's anything wrong with that, by the way.

I just think it's really important that people understand their motivations. Because if you get into this and you don't understand what's driving you, then this is one of the things that can lead you to making a mistake.

Let me give you an example of a mistake. I was working on it with someone on a deal for a beauty salon. So it was a pretty simple business. Cut hair, they did petties and manicures, that kind of thing. The person who was buying it came from the industry, and they had saved up a whole bunch of money.

And the seller, you know, was a very hyperbolic kind of person, you know, very promoting of their business and talking about all the great things that could come from this business. And the book was a mess, just an absolute mess. And the seller basically said, Well, here's, you know, here are my sales and here's my costs and this is what I earn. And it didn't match the tax returns.

And, you know, the buyer made an offer, and my advice to the buyer was to make sure there's a large amount of seller financing subject to offset in the case of material misrepresentation. And that way, if you do buy the business and it turns out they've lied about something, you have some kind of recourse in the deal. And the buyer went ahead and made an offer without any of that.

They just made an offer anyway. And then I didn't talk to anyone in that deal for several months. And then I spoke with the buyer, and I asked them how things were going. And they said that the business was closed after they bought it. And I said, What happened? And it turned out that in due diligence, they actually looked at all the bank statements and added up the deposits.

And it was clear that the business didn't have the revenue that the seller was stating. But the buyer went ahead with the deal anyway. I said, Why did you go ahead with the deal when you actually had proof beforehand that the business did not perform the way you were told? And what she said was, she said, I didn't feel like I had any choice. I'd always been in this industry, and I always imagined myself as a salon owner.

And all I had to do was sign the papers, and I would have it. What can you, what can you say? Right. But, but this is, this is a way that people undermine themselves and sabotage themselves because of these drives that, that maybe they haven't articulated very clearly. And you know, that's, I don't want to see people make that kind of mistake like that, you know, why we go through these processes in all these different steps.

This is why we have a job, yeah. You know, it's to protect people. That's, 's why I got started. People want to buy businesses without my help. And I'm like, God damn, like you can't, like you can't buy this thing because of these reasons.

But you can see what you were talking about. I love that example. And thank you for sharing. She had this emotional ideology of getting to the next level in her career and just owning something.

But it was built on falsehoods, right? And that was her motivation to just own something and get to that point in her career. And she achieved that, that it's obviously would have set her backwards.

And like you're talking about understanding your motivations, these people who are middle-aged in their careers in a Fortune 500 company. They're earning anywhere from 120 to 200, maybe K plus a year, great benefits. But they've got this goal, they've got this drive to have more control of their life and not work the hours that they're dictated.

I know that this, for example, is a lot of people that I work with who are in this position. So they want to buy an online business that can allow them the location independence and the control, calendar control, but sometimes when they see these businesses that are like, it's working, you know, 15 to 10, 20 hours a week to work in the business, and I can work anywhere. The blinkers can go on, and what they do is they get into this, uh, they used to have this really good term for actually.

They buy a dream, and they don't buy a business. Yeah. They buy a dream without the reality of what that business actually is. And they just, just block out these red flags and these risks, which your client did. And this is why you need somebody on your side to represent you, to be like, need these things in place.

So you aren't just focusing on what your lifestyle will look like if you own this business based on what you think the business is doing or what you've been sold to, right? Because, as she said, she got sold and she bought based on emotion.

I'll give you another example that I see quite often here where I live. So I live on the East Coast of Canada. So we go to a lot of beautiful coastal inlets and places where there are these old sea captain houses, and the sea captain had eight kids, so he needed a big house. Today nobody has this big family. So what naturally happens is these all get turned into bed and breakfasts, right?

And, the problem is, that if you have a six or seven-room bed and breakfast, the economics just are not there to have a successful, profitable business, especially where you have a short tourism season.

So, what happens is you get this bed and breakfast business, and the house might legitimately have a replacement value of a million dollars or something. Like it's, it's, it's a house. It's worth something. It's real estate.

A couple buys it and operates it like a bed and breakfast. And because of the shorter tourist season, maybe through all of their efforts, they earn themselves 60 or $70,000 in the run of the year. And 60 or $70,000 never justifies a million-dollar investment. So when these guys profit.

Well, yeah, but still, yeah. That's a seven-year multiple, you know.

Well, it's a profit because they live in the house, right?

But you know, their living expenses are reduced because they live in the house, and they get to eat breakfast too, and all that kind of stuff. You know, nobody would ever pay a million dollars to go work full-time with their spouse for 70 grand a year.

And so when they get tired of it after five or six years, and the romanticism falls away, the way that they sell them is not through any kind of, you know, creative accounting or, or, know, putting a blue, beautiful sim together. The way they sell it is by putting a fresh coat of paint on the house and making sure there are freshly-baked cookies in the oven every time a guest arrives.

And they just start telling people like, you know, we've decided to move on. You know, we were thinking about putting the place up for sale, and then someone will sell their house in Toronto for a million dollars and then come and buy this thing.

And, and, and they change hands, and it's, it's a bit of a, it's, it's a bit of a, I don't know what do you call that? Like a stereotype, right? That these things, these things are sold from one person who had a dream to the next person who had a dream. But eventually, people get tired of it when they realize that it's just not worth the effort. And then they want to pass it on to somebody else.

It's this is what so like you said, it's so vital to know what your driver is. What, like what, what are you, what are you actually wanting? Do you want this lifestyle? And then once you know that that's what you want is how do you connect that life?

Like, how do you find an asset or a way to connect that lifestyle that's going to make your life actually better, without just the lifestyle part, like financially better without the lifestyle part?

Throughout my life, since coming out of school, I have known a lot of people and friends who have had the dream of owning a cafe one day. I know, cafes in Australia are really, you know, nice, and you can build a community around them.

Well, they might just want to own l bar, but they don't understand how difficult hospitality and cafes are, the hardest businesses around, the least profitable, the most level of complexity, but they have this ideology of doing it. And they go away and start this cafe, and you're like, it's just financially, it just brings them back as financially crippling.

Let alone buying one. It's you know, you're putting yourself into a crippling position even faster So yet understanding the driver is key and it's fine like I think we should mention It's fine to have those dreams and you should have those dreams and you should work towards them but find the find the path that allows you to get there with the minimal amount of stress like Most people don't want to buy a business right David like who wants to buy a business?

It's a mission. It's it sucks, you know, it's hard to do, but most people want the lifestyle that it provides, and everyone should have that lifestyle that it provides. We should all have that. At the same time, we should be realistic about what we need to make sure is put in place and how we buy the right thing that can provide that.

And there's going to be challenges like, you know, you're in business, I'm in business. It's tough at times, you know, we've got these things where the economy's changing. We've got multiple things, like business is a difficult thing, and people need to understand that they're going to get into business. They need to understand that it's going to be a challenge as well. It's not just about buying this lifestyle dream, and your problems have gone.

It's, yeah. And the expectations, I think, are something that people have to manage. Will often, if I have someone who's looking at businesses that they have never been in that industry before, I'll tell them to go get a part-time job in that industry. Just so they can get some experience.

Like if they're thinking about the cafe, for example, it's like go work in one and see what it's really like, see what it's like to serve the people, see what it's like to, you know, work in the back room, like see what's really involved in operating that kind of business to know what's happening.

There's a client of mine who bought a dry cleaning business, and his goal was to turn it into the kind of business where he didn't have to be there every day. So it was going to be manager-operated, and he succeeded in creating systems and processes, and he, you know, added some great new online marketing, et cetera.

And he had a manager and staff that worked there. But when people have this idea of having a manager run things, they think that the business will take care of itself. But the reality is that there are certain aspects of ownership that will never be delegated to somebody else. So when the dry cleaning machine breaks, it needs a $10,000 repair. The owner will become involved in that.

There's no, you're not going to delegate a manager with the authority to spend $10,000 in a little business that has, you know, three or $400,000 of revenue. Um, and so, so what was happening was this person was operating, he was going to a job every day, and he was running the dry cleaning business remotely. And then he bought another business.

Which was more in line with his professional background, and the new business was going well, but the dry cleaning business kept pestering and pestering and pestering, and he talked with me once about selling the dry cleaning business. And he said, you know, I'm tired of the, the drain.

This is, I'm always thinking about it. I've always had to deal with emails or the manager calling me about something. And it really highlighted to me just how these things can really become a burden in some way. For sure.

But here's, but here's what happened is when he ended up before he bought the second business, he lost his job, and that dry cleaning business supported their family for almost a year. And so in one way, it was a burden to him, but it really was an asset. He was producing this cash flow, but there was a cost to it; even though he wasn't there working every day, it was occupied.

Some of his mental bandwidth was always focused on it, et cetera. At one point, he talked about selling it so that he could raise capital to buy an even bigger business. And what I ultimately said to him, as I said, look, a good profitable dry cleaning business like the one you own is always going to have a demand.

There's always going to be someone who wants to own one. And I asked him this question. Saidd, do you think that if you called one of your competitors and offered to sell them your dry cleaning business at a discount, do you think they would take the deal right away?

And he said, yeah, they certainly would. I said, Great. So don't put it up for sale to raise money to buy a bigger business. Just go after bigger businesses with the understanding that if you actually get a deal in hand, and if you need to raise the money, you can then go and sell them.

Sell it right away. And in the end, I think it turned out to be good advice because the profit in small business ownership is not in the sale. And there are other people online talking about buying and selling businesses, like you're flipping houses or something.

It doesn't make sense. The value in a small business is in owning it and operating it for many years. You know, you buy the thing on a two to three X annual earnings multiple. Well, then you own it for five or six years. Earn, you earn one X every year, like as you own it.

And it gets you ahead, not the transaction.

And then if you sell it again, you're going to sell it for a similar kind of multiple. The real benefit to you was the years you owned it. And, and that's, that's the key, but he got a good deal on that dry cleaner, and he knew what to do to improve it. Had an online marketing background, and this business wasn't doing much with Google Maps and Google My Business, and all that kind of stuff.

So he was able to address those problems, and he turned it into a real asset. And even though it was a real asset, the way people envisioned buying a business, being an asset, it was producing cash flow for him. It was still also a burden to the point where he was thinking about selling it because of the attention that it drew from him.

Know, and I find that people who have not been in the world of small business, in particular people who come from a big corporate environment, don't really appreciate this because when you are a bee in a big beehive, you're focused on the one job that you're given.

And if you do that job really well, it can be easy to believe that you're good at business, but you're completely unaware of all the other things that all the other bees are doing. And when you leave that hive, and you're doing your own little thing in your own small business, all those other jobs land on your shoulders as the owner.

It's ultimately your responsibility. And, you know, I see it in my own business. Every once in a while, I get some dumb letter from the government saying I have to provide some other bit of paper or whatever.

And you look at the letter, and you're just like, do I have time for this today? No, I set it aside. And then after, after a week, you're like, I really do need to get it to get like, need to address that or else I'm going to get another dumb thing in the mail.

And then you're taking time out of your day to respond to some kind of mistake that a bureaucrat or a computer made somewhere. And it just, and you're like, I really don't want to have to deal with this, but you've got to.

I don't know if you've ever met people who ignore those kinds of things, but eventually they catch up to you and then they become giant problems.

Yeah, I'm the guy that is as soon as I get something that needs to be addressed, I address it because I don't want it. I don't want to have to think about it anymore. I want it off my plate completely. But yeah, business bit like this is, I guess the way to wrap this up, David is that business is it's amazing.

It can provide you a phenomenal lifestyle by acquiring it, but don't set yourself up for failure by putting time expectations on it, buying based with emotions and understand like go back through this episode and recap like what are the things that you can do to avoid failing in your quest of a search and a successful acquisition because there's so many and get somebody on your side that can help you navigate those so you don't bump up to one of those and make those mistakes. So yeah, thanks so much for coming on David. It was such a fun chat.

I would add one little extra thing as a piece of advice, if I may, is that if you're thinking about buying a business to get into business and get to know other people and hear the things that they deal with. I was talking with a friend of mine the other day who runs a small repair and renovation business for homeowners. And in the last year, he has had to replace an employee once a month.

Like just cause he can't find the right people. And he was telling the story of, you like all the crazy things he has to deal with from hiring the wrong people. know, stories like that are great for giving people a real impression about what it is actually like in the world of business.

And you're only going to get exposed to that if you actually have people that are comfortable opening up to you about what's really happening in their lives as business owners. And that means you've got to be friends with these people. Yeah. Because if you're just, if you're just tuning into their LinkedIn posts or podcasts, they're going to make everything sound great.

Yeah, yeah, absolutely. And I think to add to that as well is make friends with business owners and understand the difference between business owners and their mindsets. For example, for somebody that's hiring employee every single month, you know, he could go two ways.

He could be like, or every two months, he could be like, I'm done with this business. I want out. Or it could be like, this is just a part of the, this is just part of the package and I'm going to find somebody eventually. And that's going to be great.

You know, so the two mindsets between somebody that's going to just run away from the problem or attack the problem and make it better for themselves. And that's the important thing is reframing is that.

Is it, yeah, you might have this problem, but you've got a solution and you can make your life better through it and using that as like the way towards it, right? Like it's the obstacle is the way, you know, like that book, Ryan Holiday. So yeah, David, where can we send people with David Barnett? DavidCBarnett.com.

Yeah, that's davidcbarnett.com is my blog site. But if you just type David Barnett, small business into anywhere you'll find me, you'll find my podcast and my YouTube channel. And yeah, I just celebrated 11 years of YouTube videos. Just talking about buying, selling, financing, and managing small businesses. And most of videos are just me answering questions from people in the audience.

Congrats.

Love that, love that. Check out his channel guys. I've been on it. It's a great channel, so much value there. Thanks for listening everybody and I'll see you on the next one.

Bye.