Learn from MY 55 Acquisitions Mistakes in 18 Industries!
Summary
In this episode, Jon Stoddard interviews Arturo Henriquez, a seasoned entrepreneur with extensive experience in business acquisitions. They discuss effective strategies for sourcing deals, the importance of understanding deal specifications, and the significance of scalability and efficiency in business models. Henriquez shares insights on managing multiple businesses, the challenges of the current job market, and the key performance indicators that drive success in various industries. The conversation emphasizes the need for strong management and processes to ensure profitability and growth in business ventures. In this conversation, Jon Stoddard discusses the intricacies of business acquisition, focusing on scaling businesses for wealth creation, understanding the differences between equity and asset purchases, and exploring creative financing strategies. He emphasizes the importance of debt management, the risks associated with leveraged buyouts, and the psychological aspects of buying a business. Stoddard also shares insights on local versus remote business acquisitions, highlighting the significance of establishing rapport and trust with sellers.
Takeaways
Arturo Henriquez has been involved in over 130 business purchases.
Effective outreach is crucial for connecting with decision-makers.
Understanding your deal specifications is vital for successful acquisitions.
Recurring revenue models are easier to scale and manage.
Having the right people in place is essential for business growth.
Scalability is a key factor in determining the value of a business.
Efficiency improvements can significantly enhance profitability.
Monitoring KPIs helps in managing diverse business operations.
The current job market presents challenges for small businesses in hiring.
Preserving capital while generating cash flow is a smart investment strategy. Scaling a business can significantly increase its cash flow and value.
Creative financing allows for business purchases without personal capital investment.
Understanding the difference between equity and asset purchases is crucial.
Debt can be a powerful tool in business acquisitions if managed properly.
Leveraged buyouts carry risks that must be carefully considered.
Credit is less important than the cash flow of the business being purchased.
The psychology of the seller plays a key role in successful negotiations.
Establishing rapport with sellers can lead to better deals.
Local acquisitions may be easier to manage than remote ones.
Every industry has potential; it's about finding the right opportunity.
Watch the Interview
Transcript:
Jon Stoddard (00:00.44)
clock.
Welcome to the Top &A's Entrepreneurs Podcast. My name is John Stoddart. I have a guest today, Arturo Henriquez. And the reason I brought him on is I was on Amazon and I got this book called Buy Yourself and Entrepreneurship. It is excellent book. it? I'm going to read just a little bit about who Henriquez is, Arturo. He's been involved in over 130 business purchases and business deals.
He's bought restaurants, tequila company, consumer goods company, technology company, bars, nightclubs, pest control, fast food restaurants, real estate brokerages, and on and on and on. And he's raised money from fans and families, from VCs, some investment banks like Merle Lynch, CBC Latin America, Citibank. He's done it all. He's been involved in over 55 companies purchased personally. So welcome to the show.
Thanks, John. Thank you. Happy to be here. Excited. Hey, I got to tell you, I ordered this book from Amazon. It comes fast. I'm in their program. So and I read it really fast. I got to tell you, I love this. From the very start of this, you talk about how like to outreach to people. mean, this is nitty gritty stuff like like the letter sending out a letter and you give the letter and I got to tell you, I'll talk about this, how to get it open.
you recommend buying black or dark envelopes so they think it's a personal letter. I mean, that's great. Yeah, It's tactics, right? So what I try to do, and I mean, this is what I've done in the past, right? So everything that's in the book and in the program, I've done personally and I continue to do today. And it really is all about getting to the decision maker.
Jon Stoddard (01:57.866)
Establishing rapport so that then you can start talking about buying a business. Yeah, how many do you send out a week or a month? I will honestly right now I'm I've got such a deal pipeline John that I I don't need to send things out. You know as many emails or envelopes or social media posts because I have so many tentacles out there. People know who I am.
They know I'm serious, know I'm actively looking to buy and sell businesses. However, when I was doing this, probably at the earlier stages, I would send out maybe 50, 50 envelopes a week. And out of those, this is important, out of those 50 envelopes, I'd research probably 50 % of those companies, right? So these are companies that I am targeting.
And what I mean research is I will go and get information on that company to make sure I'm not wasting my time because it's hard enough to get in front of someone to later then realize that that was never a good business for you to begin with. So I try to do a little bit of the homework upfront. So there's more than just the sending the envelope or getting the average, right? I would say about also probably about 50 emails a week as well.
There's a rhyme and a reason to that. You don't want to become spam. don't want Google to, or any email provider to think you're spam. So there's a number of emails you should only be sending out in a given timeframe. Now that's probably changed. I'm not a Google guy, I'm not an email guru or anything like that. And then social media posts.
I do those all the time. still do those. I do them more specific, meaning if I'm looking, so I'm actively looking for full service companies right now. So I'll see routes, like a FedEx route, but a pool route. It's just a simple business model, recurring revenue, easy to scale, low fixed overhead. I just bought one about a year ago.
Jon Stoddard (04:21.101)
I really like the business model. But anyways, in the social media posts and the outreach, which I talked about in the book is all these are strategies on how to find businesses, right? And so now I put specific industries that I'm looking for when all the other ones are not giving me that much return, guess, right? How did you come across, you know, look, I used to pay a cool round guy.
And it's reoccurring revenue, right? You sign up and you just send him 50, 90, 150 bucks a month to clean your pool and do everything else. I mean, how did you come across that? And like to me, it was just a one guy operation. So buying his business would probably be, you know, he's got a PNL on his napkin. So it wasn't really anything. How did you find pool companies that sizable enough to make sense for yourself? Right. Well, I it's, it's, I wasn't looking for it.
It's like everything else. I talk a lot in my book and in my programs that you really need to know your deal specification. It's very, very important. This is what you want to buy and why you want to buy it, right? Do I want to buy a scalable business or not? Do I want to buy a restaurant or are we in that type of industry or not? Do I want a million dollar company or a hundred thousand dollar company or not?
Do I want to be owner operator or absentee or hybrid of thereof or not, right? So all of this is your deal specification. Because I am industry agnostic now, because I've bought over 55 businesses across 18 different industries, I'm industry agnostic. So I'll look at oil and gas deals. I'll look at pool routes. I'll look at FedEx routes. I'll look at meat distribution companies. I'll look at...
home services companies, and the pool route one just happened to come my way, these would be my pipeline. Now that I bought it, and I bought it for the reasons that have been validated, which it's a simple business, one, easy business model, two, recurring and predictable revenue, right? Three, scalability, right? So those three reasons are the reasons why I bought it.
Jon Stoddard (06:45.006)
Have they proven to be true? Yes, absolutely. Yeah. So how is it? Help me out on the scalability and just like you're talking to the audience. cause my guy that I hired was just a mom and pop like, yeah. And he kept leaving the freaking door open. The dog get out like, dude, you're fired. I mean, you did that twice. Correct. Correct. So not nine, I'd say 90%, 90, 95 % of these pool pool operators are mom and pop. So they have, they,
It's their job, right? So they own a job. They own this business, that's how they get paid is based off of the profit. They're not necessarily businessmen that look to scale. They don't know how to scale. don't know how to hire. They don't know how to get financing to scale, right? You get more businesses, you get more clients, you get more residences, more pools. You need to get another truck. How do I buy another truck?
How do I hire someone? How do I train them while still managing and operating my business? So all of these things are very normal for the small business owner-operator type. And so that's why it's a very fragmented business. I bought a business or a route that was already established. It was not an owner-operator that had more than one route. I don't want to give too much away, but it had multiple routes. So it had an infrastructure already.
It had multiple vehicles. And so now I've got an ability to put processes in place, which is key to scaling, key to scaling, making sure I have the right people, which is key to running any business and scaling. I'll manage the growth. They've got to, the people have to manage the company, the day-to-day operations. So if you don't have the right people in place, then the growth and the scalability is going to go by the wayside.
I, it was, it was scaled enough and now we're scaling it so we can double it. Hopefully in a year. Yeah. That's just a, Hey, there's a new palace. Here's a new address. Do the same thing you did at that last address. You know, the word thing about the pool stuff is you'll start with the COVID stuff. Our chlorine went from like $20 a case to it doubled in a very short period of time. Yeah. There's a, a, there's a, there's a big shortage right now in the industry for industry specific reasons. So.
Jon Stoddard (09:11.342)
You know, it happens in industry sometimes and it's happening in the pool industry. Chemicals are scarce right now. know, tablets, chlorine, acid, whatnot. It'll pass. It'll pass. So we're all going to go through lower margins for a couple of months or a period of time. It'll pass.
So what's your plan with this? mean, keep it for a period of time, you grow it and then flip it or does it go in a portfolio? Yeah, well, I'm very clear on why I entered the business, right? I'm very clear on I want to buy this business because I want to, I want to, there's, there's a lot of room for efficiency for instance. Right? So I'm able to put in those efficiencies. I want to buy this business because I can scale it. Right. And then sell it at a higher cashflow.
which will garner a higher multiple, right? So I'm very clear on that timeframe. I'm not too clear on it because I don't know much about the business, you know, and I don't know much about what that implication of that scaling or efficiency does. I'll give you a great example. In 2008, we bought a bar, I bought it with a partner. And first thing anyone would say is why a bar?
It's the night club, that's the I.O. sequences of that business. It's late night, it's alcohol, it's rowdy behavior. Unless you wanna be in that, most people don't and I certainly don't, right? But I realized that the bar was, it's been operating for nine years, stable clientele, I could buy the real estate and it was absentee, but there was room for efficiencies, right?
when you buy a bar or a restaurant or a retail store, it's very difficult, not impossible to scale because you're confined by physical space or production. If you look at a restaurant, your dining room is your clientele. You can only fill the dining room so much, but you're also constrained by your kitchen capacity, which would be your factory.
Jon Stoddard (11:23.802)
So you're constrained on both ends. At a bar, you're constrained by the physical capacity, but you're also constrained by the bar, which is your production facility. So I knew it's not a scalable venture. There was efficiencies to be had. So that's why I bought it. We implemented those efficiencies. It was one of the best returns of my investments. Under seven months, I my money back on the business purchase.
Wow. a financial standpoint, a home run. mean, a major home run. And I kept it for 13 years. Why did I keep it for 13 years? Because I had no reason to sell it. It was steady, predictable cash flow. Yeah. So I didn't have a time frame. I could have flipped it three years into it, five years, seven. We actually sold it. Complete serendipity.
the month before the COVID pandemic started, of 2020. Yeah, I'd say you got lucky on that one. We got lucky, we got lucky, but we still would have made it through the pandemic. I have other businesses that suffered and we made it through, suffered, like all small business owners, we all suffered. So getting back to your question, I'm either making it more efficient or I'm either scaling it, because that's really what you could do with small businesses.
Then what happens, when do I flip it? If you want to use that word, flip it, for how long do I keep it? I don't know that till like I'm in the business. Yeah. Did you ever get any of those calls late at night? Somebody bought too much alcohol, got in an accident, now they're still in the bar or fights or anything like that? No, no, no, no. mean, it happened. It happened. But we had, you know, we had good management in place and a good processing price. So the people.
and the processes manage the problem. So in the case of a bar, the problems would be fighting, rowdiness, drunkenness. So in the case of the pool business, complaints, lack of raw materials, the people in the processes should address any problems. have good management, good people with good skill sets, and more importantly, amazing work ethic, then that's what they're there for, right? To solve those problems, to address them.
Jon Stoddard (13:49.106)
While they existed, John, I as the owner did not have to address them personally, right? And do you, you know, you look at a restaurant and say, hey, this is the management, but you really don't know the people in there just yet until they perform for a while. know, they're, right. make a judgment call and say, well, look, if for me to add revenue, for me to do what I want to do, I need to find somebody else.
Yeah, and that's a great question because it all goes back against your your why, right? So we've had chefs that have come into this business to my programs and their debts that I'm buying a restaurant and we we we we challenge them on their wives and their deal criteria. And most of them want to scale a business and we go back to look, you can't really scale the restaurant because of the physical what we just discussed, right? And they they end up changing and going to another industry.
So these are chefs that have skillsets and a passion, but scaling is a priority over this. That's again, that's the importance of understanding your criteria, right? One of my deal criteria is that I need to have strong management in place. I'm not an owner-operator. I've got, at any one time I have four to six businesses that I own. I can't be an owner-operator, it's impossible. So I have to have good people in place. Will I change them? Yes.
Maybe, no, it all depends on the business, right? But that's something that I look for as an important criteria when I'm looking at deals at the very beginning. Is there people in place? Do they have longevity? Do they have the skill sets that I need to run this business once the seller is out who's the current owner and we're in?
And maybe I'll change them, but at least in the beginning, as I get to know them, as I get to know the industry, and more importantly, as I get to know the business, I can make those judgment calls that the business continues as before I bought it, because the people are already there, right? Yeah, how do you master the ability to work above the business?
Jon Stoddard (16:10.336)
when you have so many different types of businesses you worked in to have different KPIs and metrics like, like a software business versus a restaurant business. I they're two different, like ring the bells to get more money thing. how do you That's a great question. And it really comes down to the three P's right people processes. You must be big fan of Marcus Lamontis because that's Yeah, I know. He talks about it a lot. I used to watch his program, but it's true. I mean,
Everybody talks about this, right? So if you have, we know that the product or service is already good because you're looking at a cash flowing, a profitable business to begin with. So the market has already accepted that product and service. So you can kind of check that. Can you make it better? Absolutely. But it's already been accepted, right? So the product or service, that's one of the P's, is always good if you're buying a profitable business, right?
So then it comes down to people and processes. I'm very good at processes and I'm very good at people. just, after so many years doing this and before I was an entrepreneur, you you gotta be good at these things to make it, to be successful, right? At being an entrepreneur. Let me ask you that real quick. Do you...
when you buy a restaurant, you just jump in and go, Hey, what are the metrics for the restaurant business? Like, do I want to go watch bar rescue, you know, like a thousand times? know I learned. So whenever I buy a business, normally during the first call it one to three months, I'm in the business. I'm going to be going to that business on a daily basis or almost every day for many hours. Cause I need to understand.
the pulse of that business. What makes that business tick? I have to, because the only way to manage or supervise remotely as an absentee or semi-absentee owner is to understand the pulse of the business. So if I buy a restaurant, I need to know that on a Wednesday between 12 and 1, we normally get maybe $3,000 in sales, which equates to about 100 tickets.
Jon Stoddard (18:30.488)
So if I look at the app and I see that we were at 2000, I'm to call the manager and say, what's going on? So I'll have that already that, I guess, KPI already ingrained into my mind, right? That there's something there. I'll also see the labor. And I know from owning seven restaurants and bars that above a certain percentage point of the day's sales, your labor is too high. I'll call the manager and get rid of some of these people because they're hourly.
when I start seeing those KPIs, but I need to already understand those KPIs, right? And during the first three months, that's when I learned the intricacies of the business. That's how I've been in 18 different industries. Think about that. I've gone into 18 different industries without ever being in that industry before. It's like sound like Marcus Lamont is because that's all he does is looking for people, process and products. Yeah.
And completely unrelated candy to, you know, gifts to whatever. Yeah, but he goes, goes, he goes to what I do is he goes to the, the, the, the foundations of any business and making sure that that's those are running great. What he does though, is he takes just stress businesses and implements his knowledge to turn them around. I've done that before. What I've realized, what is just not worth your time because you may be able to turn them around.
but not get as much profitability for the immense amount of effort and resources it takes to turn it around. So let's just buy a operating profitable business from the get go. Yeah. Yeah. No, I tried that turnaround stuff. It is emotionally draining. Yeah. And so there's a lot of risks. There's a lot of investment and resources at the beginning, but you're not necessarily getting the additional reward.
Unless somebody gave you the business and even that's a question. But even then there's no guarantee one, you're to be able to turn around and define turn around. Is it not losing money? Is it making money? But what is that? 2 % net profit, 10 % 20 %? No, that's that's night and day. So it's it's it's just a lot harder. And I there's so many businesses out there good solid, you know, strong.
Jon Stoddard (20:56.172)
profitable business out there to buy it. I don't need to be messing with, you know, turnarounds. Yeah. Any of these industries that you worked in, would you say, man, I'm not touching that industry again. It's just whatever it is. People, product or process. Yeah. No, I mean, there, there isn't one industry that I've gone into and said, I'm never going to be in this industry. That's never happened. Some industries are harder than others. Some industries have
but it's kind of trade off, right? Like the restaurant industry, it has a lot of turnover, right? And so if you have the right management and the process in place to address that risk or you know, you know, that intricacy of that industry, then it shouldn't be ahead. It's just part of the industry, right? So in the pool side, it's, you don't know what you don't know. In other words,
Clients usually don't change pool companies unless we really screw up, right? So you got to screw up four or five times before you're leave the door open and your dog gets out. Yes. And so when I, when I see that you, a client usually doesn't call you to tell you things are good. They just forget about their pool because it's being addressed. You're doing your job. They don't worry about it. So they're not calling you. The only time they call you is because there's a problem. Either their equipment doesn't work.
or you didn't do a good job on the cleaning side, right? So from an owner standpoint, I don't see those five strikes, so to speak, until you lose a client, right? So how do I, as an owner now, again, it's the intricacy of this industry, how do I, as an owner, start getting alerted at the red flags or making sure the managers are addressing them in time so that we don't get to the fourth or fifth one where they're like, all right, that's it.
Too many strikes, right? And so that's that that's all about training people and processes. Yeah, how do you? I gotta tell you the you probably lucky you got out of COVID. Can bring it on finding people to work with. I had a buddy that got out of college and we went to college together and he got out and he went to training program for a restaurant. One of those choice fresh restaurants. He said, man, I get like daily people walk up and we turn off piece of bag. Hey man, I can't show up. I gotta go to a concert. It's a turnover. He just hated that.
Jon Stoddard (23:25.134)
Yeah, it's been a challenge. I mean, I don't think, you know, with the stimulus checks and the unemployment benefits that have been out there over the past year and change, it is definitely hard for small business to find good personnel. I mean, it has been. That's just doesn't matter whether you're in restaurant industry or the pool industry or the fabrication industry or the trucking industry.
it's hard to compete because small business by definition, they employ people that get paid usually less, right? Small businesses don't pay $250,000 salaries. They pay $15 an hour. Yeah. Right. And those are the people that said, I'd rather stay home because unemployment is as good or just as good without me doing anything. So it's definitely been a challenge.
I see it waning away month after month. more, there's more personnel in the pool. Yeah. Now you said you own five or six businesses at a time. Do you, is that like kind of your cap, your capacity? And, and if you go, Hey, I'm going down to four, I need to go to find a business. Or is it, or like, no matter it's targets of opportunity. Yeah, there's, there's no formula. That's just, as I look back, that's just the way things have panned out.
I mean, there's been times where I've had two, there's been times where I had seven, two of them were in the process of being sold, but they hadn't sold. we're still, they're still my businesses, right? So that's just the way it's been. John, there's absolutely no, nothing to look into that. It's just by chance. So I've been with one or two businesses and I've been with five or six on average has been four to six at any one time.
I do look at a business like, you say, well, look, I could buy it at this multiple. But even if I do put people, product and process in place, it's still only going to sell at, you know, you know, 1.2 or five point, whatever it is, it just doesn't go up that much, even though you put all the stuff in place, but it has great cashflow. Yeah. So, so, so when I, when I implement.
Jon Stoddard (25:50.114)
you know, the people in the process primarily, we do, do when we're possible, we do, we do of course improve the product or the service. So we do address the three P's, but if I'm able to address those three P's, I should have some sort of financial result. So meaning I should have efficiencies. And if I have efficiencies, that means I'm to have a better cash flow. And if I have better cash flow, even if I still have to say multiple,
that I bought it at, I'm selling it at a higher price than I bought it. And in the meantime, I'm getting an annuity, a cash flow. Right? So I'm preserving my capital, getting an annuity, getting return on it, and then selling it and getting at least my capital or more. If I've scaled the business, and it's a double punch, meaning I scale it, cash flow is now going to go up because I'm scaling the revenue. So I'm going to scale the cash flow.
cashflow meaning free cashflow to the owner or profitability. And if I scale it higher, let's say I buy a business, I'll give you an example. Let's say I buy a business, stood about a million in revenue and $150,000 in free cashflow, and I scale it to 3 million, then the cashflow is gonna go up maybe by to four to $500,000. Well, the first, when I bought it at $150,000, I'm probably gonna buy that business at a two to three times.
cash multiple, but a $500,000 free cash flow company is going to sell the tune afford of six times multiple. So now I'm selling a business that I've been able to scale with more cash flow and a higher multiple. That's where you make real wealth. Yeah. Do you have a deal team that comes in and kind of takes over the business and go, Hey, we need to do this, this and this like to work on each one of those people process products?
I do, but it's not as organized as a lot of people might think, right? Because it's small business at the end of the day, right, John? So you don't wanna, I don't wanna have this big holding company that's sucking up expenses. You owe $10,000 a month or $50,000. Correct. You don't want that. So a small business by definition should be self-sufficient and make money. And again, if you have good management in place, then I just have six managers.
Jon Stoddard (28:17.324)
or five managers or four managers reporting to me. So I don't need someone up here. Now I do have a DLT when I'm doing the due diligence and when I'm doing things like that, do. I have had and I do have administrative assistants that help me, but that's just for my comfort as opposed to operations. So let me ask you about how you're, now we already talked about the how to find in the business and you know, like
A lot of people I have in my mastermind, was like, how do I find a business? Well, you just got to get out there and create massive action to get that deal flow going and very specific about who you're going for. But a lot of people get stuck at the funding the business. And I know there's the SBA, but one of the books, one of the chapters you talked about is the equity and asset. You really lined out what the difference between buying the assets of the business
and shaving off the liabilities and the equity. But can you tell me a little bit more about why that was such focus of two to three chapters? I loved it because I'm looking at business where it's public, but it's not really trading. It's an OTC market business. it's got $2.8 million in cash now. that's like, get the business to buy the business. I don't have to do it. Yeah. Well, so a lot of people, so
Just to your audience, I buy a lot of businesses without putting any of my own money, right? Meaning I don't come out of pocket. I don't have to use my capital, whether I have it or not. My students haven't had to use their capital, whether they have it or not. And so there's ways, creative and strategic ways to fund the purchase of a business without coming out of pocket, right?
One of those is to buy it, to buy the actual entity. So it'd be an equity purchase. Now, the asset purchase is the most commonly used, right? So it's value the business. You're still buying the business. The legal purchase is an asset purchase as opposed to you buying the shares of a company. The reason why you would do that is because of all the contingent liabilities that are out there, right? That are impossible to uncover.
Jon Stoddard (30:44.974)
in a due diligence, because these are not audited financial statements. They're not reviewed financial statements. Some of them are paper napkins, right? all you know. And there's a lot of personal and non-business related expenses that may be- Entanglements with the personal part. Right, so it's not a professional, right? And so there could be a lot of contingent liability. So when you buy these and you the asset, create a new company, and then you buy all of the assets, all the clients, all the cash flow.
all the goodwill, and you transfer everything to the new LLC. And so if one of those contingent liabilities were to pop up, let's say disgruntled employee sued the company, well, they can't sue you, you never employed them. The old legal entity employed them. So they would sue the sellers, the old owners, right? So that would be an example of getting away from a continuing liability. However,
when you're trying to put together the puzzle of doing a 100 % finance deal, one way of doing it is to assume existing liabilities. And the only way to assume existing liabilities with financial institutions is to keep those loans where they are. And there would be existing legal entity of the seller that you're buying it from.
And so instead of you going to a bank explaining them the deal to get new financing, you could just go to the existing bank that's already financed, know, part something about the business, you whether it was equipment purchase or whether they have a live credit or whatever it is and say, I'll just I'll just assume it. They already know the business. They don't have to start a new file. You know, you got to you still got to sell it to them.
but they're already getting amortized, they're already getting paid, they're happy. So 90 % of the convincing a bank to finance you is already done for you. And assuming that loan, but again, the only way to do that is to keep it with the existing LLC, incorporated or legal entity. So in those cases, you would buy it as an equity purchase
Jon Stoddard (33:11.598)
as opposed to an asset purchase. But then you'd have to strike very, very strong, know, representations and warranties in their legal documentation. But that would also would that also take like say if the business was for 5 million and the liabilities 2.5, you just say, well, I'm cutting cutting the valuation of business by 2.5 because I'm assuming the liability. No, no, no. So here's what happens. That's a great question. So let's say you're buying a $5 million business.
That's the purchase price, as you said, and they have $2.5 million and this is called one bank law. So in an asset purchase, you're going to come to the closing table with $5 million. And simultaneously, now the seller has to sell you everything free and clear of any liabilities. So simultaneously, that lender, that's giving that seller
is going to use the proceeds and pay off that $2.5 million loan. So the seller is going to net $2.5 million. The business is still worth $5 million. But he or she's got to pay the $2.5 million off. That's the difference between enterprise value and equity. So that's an asset. But if you said, hey, I'm going to purchase the assets and assume your liabilities, I'm going to go to the bank.
and renegotiate it as me as the principal. But I'm only going to buy it for 2.5 because I'm assuming your liabilities. So you're still buying it for five. you still want it for the business. The business is you assume 2.5 million dollars of loan. Think about it from let's go back to the asset, right? So finding our purchase, we've to come up with five million dollars, right? Yeah. You're to have to go to talk to banks and or investors or
do other creative things that I talk about in the book and come up with $5 million. A bank may lend you $2.5 million, but you've got to go through the whole business plan with them. You've got to walk them through the deal. To them, they've never seen this business. And hopefully you'll convince them and they'll lend you money. Well, in an equity deal, if the business already has $2.5 million, you don't have to do all that because they already know the business.
Jon Stoddard (35:39.15)
They're already banking. They're a client of the bank. All you have to do is convince them you're going to be a good owner. Right. And so you've already financed 50 % of the purchase with the help of the seller. Makes sense? You don't start from scratch. You've already got 50 % of it financed. Now we got to go find the other 50%. And that's a lot easier. You add in credit card financing, you add in public financing.
You're on owner financing and suddenly you have a 100 % no money down deal. Yeah. How much are you involved in raising capital aside from doing no money down stuff with banks? Like just having a fund or it's always a big conversation I have with people in the master and I go, hey, I got to start a fund. I need money to be able to buy businesses here. Yeah. Well, don't, I mean, I've been approached.
hundreds of times to raise capital. But if I don't see any benefit for me, why am gonna raise capital for a third party? I've already done that when I worked in Wall Street and KPMG and I've raised a lot of money for my businesses, but I wouldn't do it for somebody else because it's not worth my time. So to put together a fund, remember when you raise money, there's...
You gotta get into the intricacies of a fund and how they make money. And when lenders or investors commit money to a fund, well, that money costs money, right? And if you don't have active deals, it's still costing you money to have those funds, whether they're deposited in a bank account or committed. There's no point in that.
I can raise money for a business purchase all day long. So I don't need to have a fund for my deals. Interesting. Yeah. So when you have a deal and your deal flow, you have a network of investors and say, look, I'm going to need, you know, $500,000 to put us down payment and here's the business. Is that what this is like? Yeah. Yeah. mean, so, yes, I have a strong Rolodex.
Jon Stoddard (38:05.87)
Fortunately, I've made people money, a lot of money. And yes, I call my friends, family and fools, right? Yes, they're not fools anymore because they've made a lot of money. no, I have accredited investors. I have angel investors. have VCs. And more importantly, I have lending institutions. That's the majority of the money we raise to buy a small business comes from debt, not a...
Yeah, equity is the most expensive type of finance. So if I can get a bank, I'm always going get a bank. I can get a financial institution, I'm always going get a financial institution. What kind of debt to cash flow ratio do you look for in a company to cover financing? Yeah, there's no black and white. We have a formula. If you came into the program, we give you this financial spreadsheet where it's kind of plug and play where
You have the cash flow, you put in the debt that you're raising and you make sure that after you service that debt, there's still an acceptable rate of return in terms of cash flow for you. And only you can make that decision whether that's good or not. But there is no debt to cash flow ratio because everything is very different.
I put something together for a friend and I sent it off, which kind of timely because the business he had target already put an LOI on had two bad quarters. So he had approved for SBA and they said, no, we're out. Like, cause it just because they hit a 50 % decrease and then lost money the last two. Well, I mean, that's so when my, when in my program, have students that come in.
And they got these starry eyes because now they want to become instant millionaires. And these are people that have never owned a business and are buying a business for the first time. have very little capital. And now they want to buy a multimillion dollar business. And this is what I tell them because what we do is we do what's called a leverage buyout. It's been done for 40, 50 years. The 80s was the height of the LBOs with
Jon Stoddard (40:29.196)
Michael Milken and Ivan Boesky, Ron Perlman and Ted Turner and all these guys, the leveraged buyout. So if you don't want to put any money down, then you're going to have a lot of debt. So your business is going to be leveraged. By definition, that's what a leveraged buyout is. So when I tell these guys that have starry eyes and suddenly want to become multimillionaires, I ask them, say, if you bought a $5 million business and you brought in $5 million worth of debt,
And that business for whatever reason went under COVID, bad management, Hurricane Harvey, whatever, you know, whatever happened, you know, a regulation that destroyed that industry, know, oil plummeted, whatever it was, the catalyst, can your lifestyle and your life sustain a $5 million blow? Can it? Because if not,
then you can't buy that business because that's the downside of taking on that debt. You're going to be personally guaranteeing that debt. So I know you're sorry, you've got to understand the consequences. If after I tell you this and you understand the consequences and you still want to go forward with you, the all power to you, right? I don't want to dissuade you. I just want to open up your eyes. And so there is that risk of, you know, that debt.
You know, crumbling. Do you when students come through your program and you know, let's say they don't have the greatest credit ratios and they can't really borrow much based upon their personal guarantees or something. Do you get involved and he say, hey, it's a good deal. We just need to raise more money to be able to close the deal. Well, here's the thing. The the financial institutions are looking at the the cash flow at the business as the.
as they're analyzing the credit. You're just an extra layer of insurance policy. So said another way, they're not gonna lend to a bad business if you have amazing credit. So they're only gonna lend to a good business. Now, your credit is just an insurance policy. So it's not that difficult to buy or to get approved with not stellar credit. That's a myth out there.
Jon Stoddard (42:54.572)
Because again, unlike buying a home where the home is the collateral and your credit is important because the home can't pay for the credit, it doesn't produce income. Right? So it can only pay for it if you're paying the bill. Right? In the case of a business, they're looking for the business cash flow to pay to amortize and service the debt. So, so long as the business is making money,
and it's making money before they have to foreclose, it is producing. Yeah, it is servicing debt. Any of your students like just taken off like, my god, this is a eye opener to a new dimension. So 10 businesses or something. Yeah, I've had a couple. And again, I've had Jonathan suits from all walks of life. I've had bartenders, waiters, plumbers, current business owners, millionaires, retirees.
internationals, nationals, 20 year olds, 70 year olds, men, women. I've had everything that's come through. yes, I've had students that get it, it clicks and they're smart, they're disciplined and they reinvest the money that they're making on one business and on the second one on the third. I had one student that in a period of three years bought in a period of
two years bought five businesses in different countries. Well, yeah. You know, I'm like, I haven't done that, you know. So so all power to them. Yeah. Hey, you, you talked about buying a football or soccer company or tournaments or something like that. Did you what was that story on that? Yeah, was was more transaction based. So it was putting together
So in the soccer world, I don't know if you're a soccer fan, John, they have these times during the year, which are called FIFA days, right? Where all the clubs, the league stop and everyone goes back to their national teams, right? So all the Spanish players go back to Spain, the Americans go back to the United States, all the Mexicans go back to Mexico, et cetera, et cetera. And they play for the national team, right?
Jon Stoddard (45:19.086)
During that time, the clubs, so all the clubs that play in the MLS or in the United States or in the Liga in Spain or in the English Premier in England, well, those clubs, what do they do? All the players that do not go to their national selections, well, they have friendly matches, right? So they established, so did this company, which together friendly matches between rivals.
or teams from other leagues like a team in the Argentine league playing a team in the Mexican league, right? Which we'll never see or almost never see. And that's what they did. And it's just, know, if there was a good game and you had good turnout, you have a very positive financial return. Yeah. I think a lot of this comes back to your ability to read people like
getting into business with somebody or buying their business is being able to read them. What do you attribute your skill of being able to say, hey, I know that guy's, I'm looking into his eyes and I can read him. says he's unethical, even though, you know, I'm just making a wild blanket statement, but saying, Hey, he's unethical or he's not going to show up on time. But what do you attribute that to? Just Johnny, it's experience, right? I've been, I've been working in
I've been an entrepreneur for 25 plus years. I've, for my own businesses, this is that I've bought, I've had over thousands of employees now. And I've also managed a lot of employees when I was in the corporate world. So after being through so many industries and so many layers and so many different hacks, you you just get a knack of understanding people, you know, and I'll tell you something.
Buying a business, this is important for your audience to understand, the techniques, the tactics, the valuations, the financial structure, the multiples, the legal documentation, the due diligence. That's about 20, 25 % of the deal. That's actually easy. It's the psychology. The art of the deal is as we come to know it. That's where the real bread and butter is, right? Knowing how to read people.
Jon Stoddard (47:39.566)
knowing the psychology, why does someone sell? How do I position myself so that me knowing why they're selling makes me the better buyer, the better prosper? How do you do that? And it's understanding, it's understanding the psychology, it's asking the right questions, it's positioning yourself and that's got nothing to do with tactics. It's got everything to do with business tactics, it's got everything to do with.
Art and psychology. Yeah. You know, you actually talked about that in the book. Like you have three to five pages based upon what happens in the first meeting, second and third. Yeah. And you're very descriptive about that too, because it, and it works. I got, I had a meeting with a guy today, my first meeting, and we didn't talk about any numbers, anything else. I'm just trying to figure out why you've been thinking about selling, you know, what are you going to do? What do you like to do? And then I,
Saw something in the back in the background and I could tell it was a Corvette thing. And I started asking about the Corvette stuff and he opened up about that for five to 10. I'd like to go on Pacific Highway 101 riding with my wife. I go, very cool. Do you have a 2020 Corvette or something? The new one? Yeah, we just bought the mid engine one. was, love it. So fast. Like, yeah. Yeah. So what you were doing is you were establishing a report and a report leads to trust and trust leads to,
I could sell to this guy. At the same time, in parallel, you've already planted the seed in his mind that he can sell. And so that retirement plan, that exit strategy is already playing in his mind. And subconsciously, the two are working for your benefit. So it's like me doing this is helping him create, put all the puzzles together so we can go riding in this Corvette on Pacific Highway 101. Correct. Correct.
Yeah, right. Absolutely. And that's the part that, you know, a lot of people say are true. You know, this got to be easy for you because you bought 55 plus businesses. I'm like, every time I go to a new seller, the last thing I tell them is that I bought 55 businesses. That gets me nowhere. Yeah. I need to establish rapport. I need to be humble. need to be, I need to listen to him. I need to ask or her. I need to ask the right questions. I have to get him to trust me.
Jon Stoddard (50:07.502)
I have to establish that report, John, that you did with this gentleman. Me giving them all my accolades of what I've done. That was an established report. That might be a good start. yeah. Like, OK, you're bragging, Craig. Yeah, or what are you going to do? I thought knew it someone that's going to take advantage of me. Yeah. Chasing it all out and just get rid of my people and cut costs. Correct. Correct. So, so again, and that's understanding the psychology of the situation, right?
And I have to do that every single time and happy to do it because I do want a win-win scenario. do want them, you know, the business owner, seller to feel good about the deal because they're going to help me in the structure and they're going to ultimately most likely to not going to be a creditor if I get owner finances. So it behooves me to have a great rapport with them any way you look at it, genuinely.
Yeah. How often do you buy businesses out of town and you go visit them on the second meeting or third meeting? How often is that? Not much. I've had a lot of students do that and it works fine. I just haven't found the need to do that. I've looked and then I'm comparing buying a business 2000 miles away, which I like, but then I also have a good deal here.
you know, 20 minutes away. Why make it hard? Why? That just added risk to the business. Yeah. So why, you know, all things, you know, all things, you know, kind of, you know, stable. This, this deal over here is going to be harder to manage in this. Meaning that the long distance one is going to be harder to manage in this one. And if they're pretty similar,
I'm just adding an additional layer of risk unnecessarily. Now, if it's a better multiple, it's a better cash flow, and there's more to that deal, but it's always been, John, with my pipeline of deals that have come through, I always have good deals locally. And so I have defaulted locally by chance. But I have looked many times in the New England area, in New York, Connecticut,
Jon Stoddard (52:34.658)
Massachusetts, I've looked in California, in Arizona, I've looked outside of the Houston area where I live, in Dallas and San Antonio and Austin. But I always come back in Florida. I've flown a couple of times to Florida, almost bought a business out there, a car transport business, but always fell back to a good deal here.
And so you don't mind capital intensive businesses, kind of like a car transport business or the oil business. Jesus. Yeah. No, no, no. I haven't found an industry yet that I've said this is not a good industry. Right. I haven't bought a business in every industry, I bought business in 18 industries, but I have yet to find an industry that I don't like.
I think it's too difficult or too complex. Highly regulated or anything like that? Yeah, I'm sure there are. just haven't, you know, I haven't seen it. I haven't discarded anything because the industry by nature has, it's difficult or complex. Well, I gotta tell you, an hour goes by.
I love these conversations and I appreciate the time you spend with me. So I just want to my audience about this book. I reached out to Arturo. They said, what book? He's got a couple. And I asked him what book should you buy? And he recommended this one and buy yourself an entrepreneurship. And I'm a frequent, a premier user on Amazon, especially an &A book. So I loved it. And I want to thank you for spending time with me. Thank you, John. Appreciate it.
