Transcription
Hey, Roland Frazier here. And today, we are talking about what are the most important factors to know when you're buying a business. How do you start the research and outreach process?
And so, I think a lot of people believe that businesses to acquire can be found through online or offline brokers of businesses. And the truth is, is that those are really the worst deals for you to think about buying. And here's why.
[Music] Uh, when you think about when you list a house, because most, many, many people, I think, that are listening have gone through the process of owning or selling a house. And, um, and if you haven't, uh, then this will still, I think, hopefully help be a good analogy. But whether it's a business or a house or a piece of real estate, when you first think about selling, you're thinking about what it's worth. And you're typically thinking that it's worth more than it's worth because it's your baby, or it's your house, it's the business that you started from scratch, or it's the house that you loved and grew up in and your kids were born in, and you know, or you got married in, or whatever. It's a higher expectation of what you're going to be able to get generally when you first think about selling anything, car, jewelry, anything.
Then what happens once you've been on the market for a while? So when a business broker is going to someone and saying, "Hey, I'd like to list your business for sale," or when someone comes to a business broker and says, "I'd like to sell my business," or house, or whatever, right? Uh, the, the person who's the representative, the broker, is typically going to say, um, "Well, uh, what do you want for it?" And then the person who's selling is gonna say, "Either, I don't know, what do you think I can get?" Or they're going to say, "I want X." And the broker then has to figure out how can they keep the seller's expectations reasonable, but also how can they get the deal? Because they need to get the listing. And they're not going to get the listing by saying, "Well, it's probably going to take a couple of years, and I don't know that you're going to get anywhere close to what you're thinking you want for it."
So there is a, there is a, there's a compulsion to allow somebody to start out by listing a business or, uh, or a property or anything for sale for a higher price than the person who's selling it actually thinks they can get for it. And that creates an expectation in the seller that they're gonna get more for it than it's worth. So you're fighting against the expectation of the seller in that case.
Now, also, when they're listed with a broker, they're going to need to get enough to do whatever it is that they want to do after the sale. And they're going to be thinking and entering into the calculus of that decision, how much they're going to have to pay the broker. And so if the broker's going to get a 10% commission and they need a million dollars, and, uh, they sell for a million dollars, they're going to find themselves a hundred thousand dollars short, right? So the, that's, that's a challenge.
Now, as time goes on, and as the broker who's listed the business brings them offers or doesn't, if no offers come in, they're going to be like, "Oh my gosh, I don't, I guess I'm not going to get anywhere close to what I wanted for this business." And when they do get offers, they're likely to be significantly less than the asking price. So that will also help them. Why do people keep coming in and offering me lowballing me and not giving me enough money for my business? Because it's worth so much more. But the truth is, the market determines what the business is worth.
So if you come, if you have someone who has received multiple offers that are not close to what they have asked for the business, and they've turned those offers down, that is going to be helpful to you. But you're still going to be paying the highest possible price that the broker can get. Because the broker's job is to create an auction environment where as many buyers as possible are competing to buy the business for the highest price possible, and they're competing against each other.
Wouldn't it be better if you could find off-market deals that are not listed, or deals that were listed but the listing has expired so that they are no longer listed, but they, they have gone through the expectation curve process so that they're much, much more reasonable in what they'll accept? And keep in mind that 80% of businesses that are listed do not sell.
So, in thinking about how do you start the research and outreach process, one thing you could do is you could find businesses through online business sites like BizBuySell or even Flippa that have been listed where the listing has expired, if that information is available, or that were listed a long time ago, if the listing date is available. But that's still, to me, the one of the hardest ways to find businesses.
I think it's much, much easier to do it organically. You're probably not going to find businesses by running an ad and saying, "I want to buy businesses." You're probably not going to buy businesses by having a marketing funnel and running ads to that and then sending people through that funnel because it's a very personal process. And there's just, even though there are millions and millions of businesses that are for sale at any given time throughout the world, there are not really efficient markets for listing and finding those. They're, they're very, very inefficient. So most of this is happening through word of mouth and through networking. So you just have to understand that if you really want to find the best deals, you're going to have to do it through networking.
Now, the good news is that networking doesn't necessarily mean you have to join a networking group because you hate that, or go to the Chamber of Commerce meeting, or the Lions or Elks or wherever it is that people are gathering. But you can do those things. And the more that you meet people and tell them what you're doing, "I'm an investor, I'm always interested in buying and selling businesses, particularly right now looking for one that's in the Pacific Northwest that sells, uh, soap products," right? Whatever it is that you're looking for. The more people you tell, the more likely that someone is going to know someone who knows someone who's going to refer you somebody who has that business you're looking for for sale. So networking is really critical.
So some of the places that you might think about looking for that would include just friends and family. One of the deals that one of my friends, uh, bought was a, a retail store that his nine-year-old son told him about. His nine-year-old son said, "You know, Dad, the store's closing. It's one of my favorite stores. I hate to see it close. Is there anything that you could do to help keep it open?" And he ended up going down and acquiring that business, and it's turned out to be a really, really cool acquisition for him. So friends and family, you have to tell them. But your email signatures, all of the contacts that you've got socially, you can socially post on any social media that you've got saying, "Hey, I'm looking for a business like this." Right? Post your acquisition criteria. We've acquired several real estate brokerages and related companies simply by posting in our real estate, uh, site that we're looking for those kinds of companies. So you have to tell people.
You can go to, you can go to networking groups. There's BNI and and other groups like that. There are Meetup groups. So you can go to meetup.com and find through keyword searching groups in your area that are doing this. There are angel groups. There's, um, all kinds of, uh, of places that you can go. You can ask your contractors, your employees. You can ask, um, consultants in the area. You can ask mastermind people. You can join masterminds. You can go to Entrepreneurs' Organization (EO) meetings or YPO, YPO Young Profession, Young Presidents' Organization meetings. There's all of those places. Ask investment bankers, ask business appraisers, ask accountants, attorneys, financial planners, wealth advisors, all of those kinds of things. Trade associations, trade shows. You plug yourself in. The more you plug yourself into the industries that you're interested in doing acquisitions in, the more likely you're going to get referrals. The more you let the world know that you're interested in making an acquisition, the more likelihood that you will get a referral.
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