How To Buy (NOT START!) Your First Business

Ever since I was young, I wanted to be a successful entrepreneur. I grew up poor and joined the Navy at 17 years old to make my own money and travel. I started my first business at the age of 23 and by the time I was 35, I had started 7 different businesses and most of them made either a little money, or a lot of money but fizzled out pretty quickly. At age 34, my now wife and I both changed careers and moved from Chicago to Nashville. I had almost no money saved due to a divorce a few years earlier, and we were both living in an apartment with a new baby on the way. We had ZERO ASSETS. THIS WAS 6 YEARS AGO.

A year later I purchased my first existing company, and my wife started an entirely new career selling real estate. Our whole life changed. In less than 2 years my wife and I became millionaires, and within 5 years we went from renting an apartment to owning 3 companies, 3 high end short term rentals in Alabama and Georgia, 1 commercial building in Nashville, 7 acres overlooking KY Lake, Our own personal home, and another home that we rent out. As of the writing of this blog, we have about $11 Million in assets based on our last financial statement. I truly don’t say any of this to brag… but at the end of the day, when you read the writing of someone in hopes of learning… You need to know that they at least have an idea of what they are talking about. We are not motivated by money, but rather by family. I could care less about recognition or accolades and I often go months without even posting on social media. My wife and I only want to be successful so that we can take care of our family, help others, and cram as many incredible experiences as we can into this short window of time we call life.

The catalyst for our success was something I had not thought of in all those years of struggling as an entrepreneur… Buy an existing business vs. trying to think of some unique concept and start my own from scratch. For years I was driving myself crazy trying to think of some unique concept that nobody else had thought of yet. I would go down rabbit holes of trying to think up genius ideas that I could turn into a business. If you have read the book “Blue Ocean Strategy”.. You will know what I mean.

I want all of you to understand something….. The reason I am writing the blog is because I have learned something so valuable in buying 3 companies and working on a 4th…. Baby Boomers are retiring at record rates right now. Many of them have created amazing profitable companies with great reputations. They are ready to retire and pass the torch. The thing that they want more than anything is to turn their life’s work over to someone who will not only breathe new energy into the business, but also take care of the people that have worked for them. Imagine the time you could save by buying a company that is already making profit and improving someone else’s systems rather than trying to create your own…

That is precisely why I am writing this blog.

By the end of this blog, I hope to achieve 3 things.

1. Convince you that buying a business is far better than starting one.
2. Give you the courage to take the first steps.
3. Show the you exact steps that I use over and over to purchase businesses.

Disclaimer: This is a blog and not a book. There is no way that I can cover EVERYTHING. You don’t need everything though. Most of your learning will be from DOING and not READING anyway. I will however, give you a foundation that I believe you will feel pretty good about when it comes to finding a business that is a good fit for you. I promise not to hold anything back.

First.. Who am I and why am I even qualified to talk about this?

Well… because I have done it. Over and over again. My wife and I currently own 3 businesses and we purchased all of them.

1. The first business was a large preschool in Smyrna, TN, purchased for $225,000 in 2018. it was in business for over 25 years before we bought it. It currently does $1.5 million per year in revenue and is worth close to $2 Million.

2. The 2nd business is a high end boutique MedSpa in Brentwood, TN. It’s currently the highest rated MedSpa in the wealthiest county in TN. We purchased it in 2020 for $125,000. It had been in business for almost 10 years when we bought it. Today it’s worth more than 5 times that.

3. The Brentwood Blind Company. Specializes in high end window treatments. Purchased for $2.7 Million in October of 2022. It had been in business for 17 years when we bought it. On track to hit $3 Million in sales in 2023 and we are about to open the 2nd location.

If that wasn’t enough… We are currently doing diligence on a fairly large flooring company just outside Nashville. 30 year old business, great track record, $4 Million in annual sales and the owners want to retire. We will see what happens but things are looking pretty good.

Crazy thing is… These businesses are very different and in completely different industries. You might be thinking… How do you learn how to run these different businesses? Most of the time we learned from the employees AFTER we bought it. The thing we got right was learning how to evaluate the business and look at the right things to make sure it was viable and on the right track. The rest was fairly simple.

I think this can be better explained by sharing how we purchased our first business. THE PRESCHOOL. This is gonna sound far-fetched but I swear EVERY PART OF THIS IS TRUE.

When I was 25, I started a coffee shop with my best friend in Las Vegas in 2007. Huge mistake. It failed miserably when the recession hit and I got into $200k in debt. I was so broke I was almost homeless…. And the icing on the cake? I had my first baby on the way. Businesses everywhere were failing and I really didn’t want to get a job, so I got involved in a network marketing company because it only cost a few hundred bucks. I sucked so bad that I didn’t make a dollar for 3 years. I believed in the vision, however, and stuck with it although I actually had to go and get a job anyway. I got a job on Craigslist teaching ballroom dancing while I was trying to build my little MLM business. The dance studio wanted people with no experience because it’s easier to teach from scratch than to teach dancers to unlearn and re-learn dancing. One day.. a gentleman pulled up in this insane sports car for his dance lessons with one of the female instructors. He was outside smoking and I happened to be outside as well and I asked him what he did for a living. He said “I own a bunch of pre-schools.” I was like “wow!” That was the only time I spoke with him. This was 2008 and I never forgot it. I quit the dance studio 6 months after.

Fast forward 8–9 years later to 2017. I am still in network marketing making pretty good money. But I HATE the travel. I am always gone or on the phone, and it’s wearing on me. I have my third daughter on the way and that’s when it hit me. I needed a change. I loved entrepreneurship, but I needed a business that I could turn on and off. Something that isn’t all day everyday with never-ending travel. I became really burned out so I started thinking of a million different things I could do. In fact… I was actually depressed during this time. I was lost, unhappy, unfulfilled and kind of scared to be honest.

After Mia was born, we needed to put her in a preschool. I went to the KinderCare near our house and I will never forget the shock. After our tour, the director told us it was A YEAR WAITLIST! I was like.. What??? Then she proceeded to tell us that when we got in, it was $300 PER WEEK. My jaw dropped. We finally got her in because we had no choice, and after about a month, we weren’t happy with the care. I brought it up to the director and her response is the reason I am here today… She literally responded to my concern with…. “I totally understand! If you aren’t happy, you are more than welcome to find another place!”

Now most people would have been pissed off… Not me. I was enlightened… In that moment I thought to myself…. OMG… I can’t believe that there are businesses that actually exist with a waitlist of a year, the ability to charge this much, and they don’t give 2 shits if they lose a customer because they have a hundred more lined up….. I looked at my wife and said to her… “Babe.. We need to open a preschool.” She responded with… “We know nothing about opening a pre-school.” As with everything we have ever done… I just said.. “It’s ok! We will find a mentor.” I starting thinking to myself.. Do I know anyone who owns a pre-school? Then the guy with the sports car came to mind. 9 YEARS LATER I REMEMBERED! I called the dance studio and asked if they remembered the guy who used to come all the time in that red sports car. Thankfully one of the employees remembered. She said… “Do you mean Danny Smith?” They wouldn’t give me his number so I had to spend time on Google trying to track him down. Finally I found his number and just called him randomly….

He answered, and I was genuine. I told him he probably wouldn’t remember me but he took dance lessons years ago at a studio I worked at and I admired his car. I told him that I had asked him what he did and never forgot when he said he owned a bunch of preschools. All these years later, I mentioned that my wife and I were seriously considering opening up a school of our own and was hoping he would have lunch with us and give some advice…. The rest was either God or luck or whatever you want to call it. We met for lunch and it turned out that his wife passed from cancer a few year earlier and he had no passion anymore for the industry. He had offloaded all of his schools and he had just ONE LEFT. Yes….. We purchased his last school. The reputation wasn’t great because he was mostly hands off, but it was profitable and in desperate need of new energy….

He sold it to us for $225,000 which was way underpriced but he wanted out of it and he even seller financed $50k. HERE’S THE MOST IMPORTANT PART. He taught us in 4–5 lunches everything we needed to know to run it. There was a long time director in place already so she knew 100% of the day to day. We learned all we needed from her after.

Now lets move forward.. Sorry, I can write another blog on how to run a business or grow a business, but I need to keep this blog on topic…. WHY and HOW to find a good business to buy. Here are the steps….

1. Mindset: I have to cover this first. There are some important things you need to know before you start looking.

A. It’s ok to buy a business. Crazy I have to say this, but so many people I meet have this weird ego about purchasing a business. They feel that if they don’t start a business themselves and come up with the idea, that it’s like cheating or something…Listen closely. 80% of businesses fail within the first 5 years. Starting a business of your own typically takes years to start, grow, and master, and you are guaranteed to make costly mistakes along the way. Save yourself the time and be efficient. I WOULD RATHER BUY A BUSINESS AND IMPROVE ON SOMEONE ELSE’S SYSTEMS THAN CREATE MY OWN FROM SCRATCH A MILLION TIMES OVER.

B. Don’t feel like you have to know everything before purchasing a company. If you follow what I am about to teach you, you will know that it’s crucial to buy a business that already has a strong team in place. In every business we purchased, we learned 95% of running it from the employees that were already there.

2. Where do you look to start evaluating businesses?

With the preschool we got lucky and it was from a phone call, but the MedSpa, The Blind Company, and the Flooring Company were all from the same place. bizbuysell.com. It’s the largest platform for buying and selling companies in the U.S. There are brokers all over the place that handle the buying and selling of companies and most of them put their listings on bizbuysell.

What type of business is best? That depends on you. Do you have a passion for a certain industry? Do you have a skillset that would make owning that business easier? Here are some things to keep in mind and they are my personal opinion and my own preferences..

A. Stay away from franchises. Franchises are not what they used to be. Now anyone with one location and enough money to hire lawyers can franchise their unproven concept. Plus, you will to some degree be at the mercy of the owner of the company, have to pay them forever, and have to trust that they will always do the right things. I’d rather find a company that is ran well, but I own it completely and can pay off the loan.

B. Use common sense when choosing the industry. You don’t want a business where you have to create the demand. There are too many businesses with demand already built in. I focus on ESSENTIAL or LUXURY. Here is my test…. Would this business be something that I need or want and would I go to Google to search for it? I DO NOT want a business where I have to convince someone that they need or want it. I don’t like Restaurants or Smoke Shops or any other fad business. Some business I have looked at recently are…. Flooring Companies, Concrete Companies, Garage Floor Epoxy Company, Addiction clinics, HVAC companies, manufacturing companies. If you live in a growing market…. There is something unique that I have found. When a market is growing fast…. Lots of businesses flood the market to support the demand. When that happens, you will have more competition, but you will find that most of them SUCK. They don’t focus on QUALITY, they are terrible at COMMUNICATION, and their RESPONSE TIME is garbage. This is great because if you can be good at those 3 things…. You can build an incredible reputation in a SINGLE year whereas it used to take 10. Ask your friends on Facebook in your city… What is a business where it’s hard to find quality or hard to get a hold of anyone? You will get some answers.

C. I ALWAYS look for companies with a great team in place that is NOT owner dependent. I always look for absentee owned or a semi absentee owned businesses. If that business really depends on the owner being there, I stay FAR away from it. I want a business where the owner has already built a great team. If you don’t have a ton of business experience, this is a must when buying your first company. Without a great team in place, you might as well start your own from scratch.

D. Look for companies with a good reputation. If they have tons of 1 star reviews. I don’t touch it. It takes 40 Five star reviews to eliminate A single One star review and when you buy a business, the google listing stays and you can’t wipe that reputation clean and start over. You can’t call Google and say you are the new owner and have them give you a new listing. I like making good things great, not making bad things good.

E. Look at the listing and see if they mention “seller financing” or if it is SBA (Small Business Administration) approved. Buying your first business is the hardest just like everything else. If the seller is motivated enough, they might be willing to finance part of the purchase price. Also, some businesses are already approved by a certain lender or bank with the SBA. I have a Love/hate relationship with going the SBA route. I’ll cover this shortly.

3. How can you tell if the business is worth looking at?

There are thousands of businesses on BizBuySell. Many of them are a waste of time. Most times, I will go the the website, put in the area that I am looking at, and then use filters. The filters are great! You can choose businesses that have seller financing, absentee ownership, price range, and any other option you can think of.

4. What happens when you find a business or a few that look interesting?

The process here is usually the same every time.

A. You fill out the quick form that puts you in contact with the broker.

B. The broker will ask you to sign an NDA (Non-Disclosure Agreement) before sending over any info. The seller usually will not want the employees to know they are selling and so the listing is often vague and never shows the name or address. Don’t be alarmed. They do this intentionally.

C. After you sign the NDA, many times the broker will want to qualify you. They will ask you a few questions such as if you have experience in the industry, if you are financially able to purchase the business if everything looks good and so forth. The key here is just having confidence in your voice. I let the broker know, that I do have business experience, I am looking to shift into a new industry and this business is in the wheelhouse of what I am looking for. I will then ask the broker some of my own questions. My biggest question is always…WHY IS THE OWNER WANTING TO SELL?

D. Then they will send a CIM (Confidential Information Memorandum). The CIM will usually show the name of the business, location, photos, important details on the owner and business, the past 3 years of financials, and a basic rundown of how they arrived at the price they are asking.

E. I go through the financials carefully and start asking my basic questions. I don’t ask to speak with the seller unless the financials look good and I am ready for the next phase of talks. I am not an accountant or a financial expert… but if you do this enough, you will see patterns and get the hang of it. Normally these are confidential, but since I bought this company, I can do whatever I want. Here is the actual CIM of The Brentwood Blind Company. This is what I looked through before deciding to move forward. SEE BELOW!

The company initially stood out to me because it was a luxury product, in a luxury area. The company was very profitable, and the owner was almost entirely absent for the last 2 years. The reviews were good, his accounting was perfect, and the team had been there for years. The employees were very specialized and were great at sales. I saw a great company that I could make better with my energy. The seller wanted to get out of retail sales because he was building warehouses and he’d rather deal with single tenants than lots of customers.

If you look at the pic with 2021 numbers you will see that the cashflow for 2021 was $750,000 net profit. The column on the left is Actual, Middle column is add backs, and right column is adjusted. Let me explain.

Left Column is exact numbers with all expenses

Middle Column is adding back anything that is considered profit such as the owners personal pay, and personal expenses because that is technically profit.

Right Column is the ACTUAL numbers after you adjust the numbers to include everything in the middle column.

Left column shows a net profit of $32,961 after all expenses. That seems scary at first until you see the add backs. Disregard the PPP loan as that is irrelevant. The big add back is the $692,876. In this business the owner put himself on the payroll as a W-2 employee. You will see on the left that the total payroll for 2021 was $983,143… Of that number $692,976 was what he paid himself. Then you will see small things such as $3,615 which was his personal life insurance that he ran through the business and $20,271 which was his personal vehicle that he bought through the business because he drives it to and from the business. After you add all that back, and then include the $32,961… You will see that the ADJUSTED PROFIT is $750,000. This is actually what the net profit is when you take the profit of $32,961, and add his personal paychecks, and his vehicle, and his personal life insurance.

My next question was…. Why did the business make less money in 2019 and 2020? Now I wasn’t really disappointed because even the worst year was a half million in profit, but I still wanted to know the discrepancy… You can probably guess… COVID.

NOW FOR THE IMPORTANT PART. How did they get to the asking price.. which was originally listed at $3,350,000 and will the business support a loan for that amount? I won’t cover a ton of detail here because it truly varies business to business. But a solid rule of thumb is this….. Businesses are often listed at between 3–4 times net profit. Based on that model, I felt the asking price was extremely high…. By close to a million dollars. If the business averaged about $625,000 in net profit per year over the last 3 years…. Then the business should be worth about $1.9 Million — $2.5 Million PLUS FFE (Furniture, Fixtures and Equipment) In this case the FFE was about $150,000. There were 3 company vehicles, tools, scaffolding, fixtures, computers, etc.

So based on my numbers, I felt the business was worth between $2.1 Million and $2.7 Million.

My first goal was to see if the seller would understand that and lower his price. It would be pointless to move forward if he wasn’t willing to come down. After a few weeks of negotiating, we settled on $2.6 Million. Now time to see if I can get financing.

5. How to come up with the money to buy the business

There are really only a few ways to do this.

• Pay Cash
• Get a loan
• Finance through the seller
• Find an investor
• Some combination of the above

As of this writing, the lending environment is tough. Interest rates are high and banks are really tightening with who they lend to. It doesn’t mean it’s impossible, but rather just more difficult than it was during the easy money days with low interest rates.

An important thing before I talk about raising money: Make sure you run the numbers first to see if the business can pay for the loan plus have a good margin of money left over. Here is how to do it. I used this tool extensively when purchasing Brentwood Blinds.

https://www.commercialloandirect.com/monthly-payment-calculator.html

If you are buying a business only… the loan is typically 10 years from a bank

If you are buying a business WITH PROPERTY, The loan is typically 25 years so you have to calculate accordingly.

The tool above is simple. You put the loan amount, the interest rate, and the length of the loan and hit calculate. Look at the monthly payment and make sure that the business is making quite a bit more than that. In the instance of the Brentwood Blind Company, The loan amount was for $2,667,000. The interest rate was 7.25% and the loan term was 10 years. Calculate this and the payments were $31,000 per month.

Crazy right! The business however averaged over $50,000 per month in profit and so I felt that was enough margin to take the risk.

The only option I am going to cover in this blog is getting a loan via a bank or an SBA loan. What is the difference anyway?

A conventional bank loan is the route I would have gone if I could have gotten financing without using the SBA. Unfortunately I couldn’t, so I had to go the SBA route. If you don’t understand what the SBA is, let me explain. The SBA (Small Business Administration) is a federal agency of the U.S. that provides support to entrepreneurs and small business owners. They have tons of resources and training but the important thing I want to cover is what they do in regards to loans. The SBA does not lend you the money to buy a business, but what they do is GUARANTEE the loan for a bank if you meet their criteria. Most banks have a whole department dedicated to just the SBA.

The good news is, a bank will always lend to you if the SBA guarantees the loan because no matter what, they will get their money back so there is no risk. The bad news is, the criteria can be a bitch. You will have to use any personal assets you have as collateral and the requirements are very tedious. I had to send over everything from tax returns, to bank statements, and even assign them as 2nd beneficiary on my life insurance policies.

There is one really good thing the SBA does however that made a huge difference. In order for the SBA to guarantee the loan, they will do a whole independent analysis and appraisal of the business to make sure it’s worth what they are asking and that based on the price, you will be able to pay the loan. I can’t tell you how many times I was back and forth on buying the Blind Company because it was scary expensive, and the loan was more than anything I had ever borrowed before. At the end of the day, I left it all in the hands of the SBA. I told my wife… well, let’s let the SBA do the full appraisal and see what number they come back with. If they say it’s worth it and they will guarantee it, then we move forward… If they don’t, we walk away.

Well it more than appraised and the rest is history. We have owned the company for almost a year, and we are breaking monthly records left and right.

If you have never owned a business before, SBA is probably the route you are going to have to go unless you can negotiate seller financing or have cash. I do recommend it however because they are like a silent partner to help make sure you are doing the right things and you have thought of everything before you close on the business.

Summary:

There is no perfect or right way to do a single thing. Our success has been a combination of doing the right things, good timing, and investing well. I think starting a business is amazing, but for us personally… I have learned that buying a well ran existing business is a great way to save time and energy. It’s not always for the faint of heart however, because all business is a risk, and it takes hard work to be successful. Then again, you probably wouldn’t be reading this blog if you were afraid of hard work. Sometimes the best way to learn is to dive head first into a situation out of your comfort zone, and trust you have the intelligence and work ethic to figure it out. Although this blog isn’t EVERYTHING you might need to know, I hope that it is a launchpad with some helpful insights into the world of buying a business, and at the very least, it gives you a little more courage and confidence to look into it. GOOD LUCK!!!

Afterthoughts:

What skills do I need to be able to buy and run a company?

One of the scariest parts for me when purchasing our first business was going from 0 employees to 33 overnight. I wondered if I had any idea on how to lead them and if it would all fall apart. Here is what I realized. Leading people is mostly common sense if you truly care about them.

As an owner/leader, your job is to steer the ship. It doesn’t matter if you have 1 employee or 100, the foundation of any team is..

1. Communication. This is the most important skill you can have in business. Some would say it’s sales, but I would disagree. The ability to communicate clearly and effectively will accomplish more than any other effort.
2. Building a vision. If you aren’t growing you are dying. There is no standing still in business. People always want to be apart of something that is growing because people want to grow, move up, and develop. When I buy a company, I let the team know immediately that we are going to be the best and the biggest. The company is more important than any one of us, and so there is no confusion, I will have whatever conversation that is necessary as long as it’s in the best interest of the company. If the company does well, we all do well and so we all have to work together to make it the best it can be. I also let them know that we all work for someone. There is no such thing as the boss who doesn’t answer to anyone. You might have to answer to me, but I have to answer to the customers and so we all have to answer to someone. That’s why a team is so important and we have to work together and put our best foot forward to grow the company.
3. Accountability. People need to know where they are at and where they are going. You need to have accountability around your numbers, the roles of your people, and any other metric that is important to the business. This isn’t hard. Find out what is important to the growth of the business, and measure it. Then get your team focused on improving the metric.

Is it way harder to buy a business now that lending is harder and interest rates are higher?

Yes and No. Remember, baby boomers still want to retire. They know what is happening with interest rates too. It’s not that it’s harder to buy a business, you just have to be more creative. Whereas sellers might not have wanted to seller finance anything before, they are far more open to it now because they know that if they don’t, chances are their business isn’t going to sell. Don’t be afraid to ask for some seller financing. NEVER HURTS TO ASK. And remember this… When the cost of borrowing money goes up, prices come down. So lending might be more difficult, but you should be able to buy a good business for much lower than you could have a year ago.