Transcription
The seven deadly businesses that you should never start or buy. That is what is on this episode today of the Big Deal Podcast. I'm Cody Sanchez. We're going to be talking about what is the right fit business for you, what to never start, and define the right acquisition for you.
Now, this is a new podcast. It's all about buying businesses, not just big thinking interviews or building businesses. We're going to do those, too. So click off if you absolutely never want to be an owner, never want to buy a business, never want to start one, and don't want to know about the seven that will absolutely murder you should you choose to start them.
I'm going to start with a story that happened when somebody didn't listen to me and chose one of these seven deadly businesses. So I remember I opened up this email with a frantic note from Mary. I'm going to change her name because otherwise that would be rude. She was one of my business buying community members in our very first year of teaching other people and she bought her first business and it was not going well. Losing money, partnership imploding and an incoming lawsuit. All the things that go bump in the night.
So, how did this happen? Well, to make matters worse, she was a new mom with a baby that needed her. And I couldn't see any way out of her losing $100,000 on this deal. And I remember just thinking, God, Mary, what what happened here? She was in the arena and it was hard. But the worst part was this all could have been avoided.
Here's what Mary did wrong. She bought a restaurant franchise that was losing money. Strike one. She then did a 50/50 partnership deal with someone she hadn't done business with before. He brought no money to the table, but got all of his 50% of his equity on the very first day. Yikes. Strike two. Then she and her partner hired an inexperienced operator. He'd never done this before. Strike three. Cherry on top of the business was a three-hour flight away from Mary's home. And I remember thinking like, "Dear sweet Mary, what the literal fuck?"
You know, we eventually got Mary out of this deal, thankfully. But even if she'd bought the restaurant and done everything else right, she would have still found herself in a losing situation. Why? Because some businesses are deadly to your money. Restaurants being one of them, and you should avoid them at all costs. Yes, you want to find the right business for you. But if that business has such a high failure rate that you know you're going to lose, treat it like a landmine. Don't go anywhere near it.
Whenever I buy a boring business, I'm obsessed with one thing, you guys. Probabilities. What is the likelihood that my money leaving me comes back with more money as friends? That is the only game we play and those are the only businesses we buy. So, let's talk about those rascal businesses that love to murder your money. And then just so you know, I want you to also take four things at the end of this video.
One, we only buy profitable businesses. Don't do what Mary did. Two, you listen to the seven deadly sins. Three, we're going to do a whole different episode on partnerships. Please don't do 50/50 partnerships up front with no milestones and giving them all your money away up front. That's not how this works. And four, let's make sure that your first business is close to you so that you can go and deal with what will happen in any business, which is issues. Okay, just the first four.
All right, so the number one deadly business, restaurants. I don't care if you're a foodie, your burgers are legendary, and your buds all tell you that you should run your own restaurant. Don't do it. Restaurants are for people who simply cannot exist without running one. They're not for making money. Now, you could say, "Is Cody just an asshole?" Well, questionable. But no, I'm realistic. The numbers don't lie. The reason the numbers don't lie is that the average small business in the US sells for around $800,000. The average restaurant That goes for about 198,000. Why? Because 60% fail in the first year and 80% fail after four years. The restaurant business is one hard slog. I mean, can you imagine wrangling servers all day, guessing if fickle crowds will eat your three-day old shrimp before they become completely irrelevant and you have to throw them all away even though you spent thousands on it? No wonder banks don't lend to restaurants. If you don't believe me, also read Anthony Bourdain's book on how restaurants are terrible business and so many of them go under. Let me just save you that pain. And I know somebody in the comments is going to be like, "But I make so much money on a restaurant." And we're going to tell them, "Thank you. We love eating at your place." That's incredible. Thank god some people are psychopathic enough to run a restaurant and actually really, really good at it. I just don't think it's the easiest one. So, no restaurants.
Number two, hotels. Hotels aren't businesses. They're real estate with too many parts masquerading as a business. The cash flow typically isn't enough to even cover the real estate transaction. If you are dying to own one, do a small version before you go mega. Otherwise, I think it's a pass. These things are expensive, massive wear and tear, asset heavy, and often include restaurants. So, they're also one of the few businesses where your customers require your help 24/7. If you're like a tippy tippy tippy top tier operator, you can make a killing, but we don't jump into shark-infested waters to start. So, this is a pass. Also, if you don't believe me on this, go have some fun and look at the average margin on hotels. Do you guys know they are negative margin, which means if I give you a hundred bucks in a hotel, uh, you actually don't give me anything back, you cost me another 15 bucks. They have a negative 15% margin on average. So, you might go, "Well, wait a second. I see a lot of them. How are they still up and running?" It's through smart taxes and depreciation. So, it's really a real estate play and everything on top is uh is not for money making.
Okay. Number three, retail storefronts. I know that it's every lady's dream to start a little boutique with all your favorite things. You have your friends come in and you sell as many live, laugh, love tees as your heart desires. Boutique owning can be a fun job for a very bored, very rich housewife who wants to pretend she runs a business and her husband wants to fund it for her. Small problem, her business is actually awesome at only one thing, burning money. So, just to be fair, it's not just ladies. Don't come at me in the comments. Mini agent wants to own that store with a bourbon bar and clothes that are actually cool. Man, nine times out of 10, terrible businesses. The future in retail continues to be online except in high traffic like experienced based areas. Just ask, I don't know, Dillards anywhere. The flagship Dillards was a 200,000 square foot dark and empty store these days. If I had to own retail, I'd own luxury because rich people pay more to solve their problems. But unless you're buying Louis Vuitton or Christian Dior, both of which were massively distressed, by the way, and had to be turned around through a merger now known as LVMH, I'd be a hard pass.
Here's why. One, you buy product upfront, which means there's no float. Float basic basically means that you can get some some products to sell before uh having to pay for it. So when you buy retail supplies to sell in your store, you pay upfront. They ship those items to you, which you need to stock and likely hold for a season to start. Leftover in inventory, too bad. Order new fall styles in summer even though you can't sell them for 60 to 90 days. Ouch. Two, high rent for high traffic. The cash flow realities of a high overhead business model like specialty retail are like not to be messed with. Most won't ever tell you how much they really make. Like a lot of these mom and pop stores, they're funded by people with just a lot of cash. It's like a a defective side project or to bolster a brand's online e-commerce business. And you live and die by sales per square foot. But in order to get enough volume, aka people coming in and paying you, you have to pay rent that's high. The third is tough financials. So, the high turnover of inventory, all your stuff necessary to keep customers coming back, gives me more issues than I'm willing to deal with. So, what are you stock when? How do I ensure my lower pay employees aren't stealing? How come no one will give me a loan to start this business? Those are all fair questions. Your largest problem won't be your gross margin, aka what percentage you make on each item you buy and sell. It'll be your net profit and getting enough volume to handle your fixed costs. So, like I got a 100 bucks in rent every single month I got to pay, but I only sell 20 bucks worth of clothes. Rut row.
Hey guys, if you've ever thought about buying a business, we've built what I think is the best acquisitions and business buying community and education curriculum in the world. If you've ever thought about wanting to buy or own a business or if you want to add more businesses to the mix, it's called the contrarian community. And what this is is the goal is we give you the three things that the best business buyers use. your own advisory team, your own investment committee, and a deal team. We get together each week to review deals live and beat up all the deals that you're currently looking at while you simultaneously learn the best way possible, which is called modeling by seeing other people put together deals. This is how private equity buys businesses. This is how investment teams work. And we're stealing the methods from Wall Street and giving them to you. If this is interesting to you, go to click the link and you can actually talk to my team direct about if this is a fit or not. We can help guide you. The link is in the show description.
Number four, what I don't like, the number four business I don't love, consulting firms. Consulting firms have one thing more dangerous than almost anything else in in business that you're going to buy. And that's called keyman risk or owner centric risk. When the head honcho consultant with all the relationship leaves, there goes your business right along with it. Even at a smaller size, consulting firms, they require too much capital in the business attached to your consultants, aka labor costs. People are expensive. It's kind of also not a business, but a collection of individual jobs. So, don't buy jobs.
There's two ways around this, though, in my opinion. One is government consulting firms that transition from one specialty group, like a veteran or female-owned owner, to the next. These have like long-term contracts, strong margins, great. Two, if you have a consulting firm that is highly established, many levels of engagement, no one key consultant, and ideally productized services that are not customizable could be great. I think one of the kisses of death to actually enjoying running a business is playing the RFP game. You guys know what that is? It's basically where somebody says, "Can you please customize this thing specifically for me?" You do all this work ahead of time. Then you send them your plan for them and they tell you, "No, I chose somebody else." So, you basically don't even get the business, which means your clients get to ask you to do all this work upfront and you have to prove you're going to do work well for them later, but uh they don't have to pay you. So, I'm a pass. Show me the money, then we can talk RFPs.
The fifth business, personal brands. Until AI completely takes over and can deep fake mimic everything, which is probably like tomorrow, you can't transition a personal brand to yourself. I've seen lots of people try to sell their face branded YouTube account, social site, or education business again with their face all over it. It doesn't really work. Keyman risk. Because once somebody sells their business, they're about as engaged in running it as your cat is interested in coming when it's called. Right? Unless you tie the deal to a ton of cash, it'll be a slog that ends in failure now. If you insist on doing one of these deals, do me a solid. Buy the rights to their likeness. Also a famousish example is this guy James Altter. He sold a newsletter to Agora Financial and I know James, he's a great guy for I'd guess eight figures. I didn't ask him. And they had the right to email for a set period of time as him. So no one knew the difference. The downside is I would never do that deal that James did. Could you imagine the like what if all of a sudden if I sold my likeness, next thing you know I'd be in your inbox in a bikini asking you to buy [ __ ] crypto. And now you see both sides of the coin. Also, I'm probably too old for them to want to use in a bikini, but you get the idea.
Number six, Amazon FBA drop shipping. So, fulfillment by Amazon FBA doesn't sound like a bad idea at first. I mean, who doesn't want to look like the before and after image of Jeff Bezos? Billions will take you from nerd to jacked pretty quick. You get to leverage Amazon's massive scale and logistics. They handle all the fulfillment, aka sending and shipping your orders. All you need to do is set up the listing pages that Amazon kind of takes care of the rest. They'll send you the customers via search supposedly. They'll handle product storage, shipping, and handling all while you collect checks. Heck, you could even pay one of those lovely Tik Tokers 5K to 20K and they'll set up your store for you. But here's the dirty trills that is so scammy. The only way people can reliably make money with drop shipping through fulfillment by Amazon is to teach others how to do it. And here's why I would never ever do this type of business.
One, platform risk. Amazon controls everything. The biggest feature is also the biggest bug. What happens when Amazon decides your product is a scam because a competitor puts up a bunch of fake reviews? That happens. I actually know a guy that was doing 1.5 million in sales and had his account banned for fake negative reviews. They couldn't get it back for 90 days, by which time he'd gone out of business because they didn't have enough cash on hand. Another crippling scenario, Amazon gets all your data on how incredible your niche is and duplicates your product with a cheaper version of their own. They instantly become the number one search result and your sales drop permanently. This happens all the time, by the way. The next reason is it's really competitive. The barriers to entry to this game are lower than I don't know FTX's actual balance sheet was. Amazon is flooded with me too sellers pushing their knockoff products right and left. The Chinese in particular are impressively fast at copycatting products. Even before we got into our little trade tiff with them, so their speed is almost as impressive as their indifference to the actual words intellectual property. Chinese sellers outnumber US sellers by almost 3x on Amazon. So often it's just a matter of time before they crush you. And then lastly, Amazon sets your price. Amazon actually uses a bot army to scrape other websites for pricing information. Let's say you list on Amazon and your website. If they see your prices too high, they may shadowban your account, which is a sales killer. So, if you want to sell higher on your own website or everywhere else, it's a no. Even if you sell your own branded products on Amazon, it doesn't mean that you get to set your own prices.
All right. One of my least favorite businesses of all time, dry cleaners. Why? You might say, "Cody loves Laundermats and hates dry cleaning." Yes, I do. Dry cleaners appear to be a stable, reliable business. But the truth is, the chemicals used in dry cleaning are often toxic. And if you're not up to code, the cleanup costs can be insane. It also makes it really difficult to find reliable employees who want to stick around. So, the reason that I don't like dry cleaners is this big word called remediation, which basically means if the toxicity gets into the ground, which it often does, then you are responsible for any third-party effects of that. That is scary.
Now, what's the rule? All of these businesses have some combination of high failure rate, asymmetric risk, high expense, low transferability. We don't want that. Now that you know the seven deadly businesses to avoid, we can move on to the next step. Let's talk about finding what you want as an owner, or what I call knowing thyself and defining your unique deal box. I want to talk about how to choose the business that's right for you. The most common DM I get goes like this. What type of boring business should I buy for cash flow? What you really want to know is, should you go out and buy a laundromat, a car wash, a pack and ship, a mini storage? But a horrible answer would be for me to tell you one of those because it's the wrong question to begin with. The better question to ask is this. What type of boring business is right for me? The truth is there is no such thing as the right or wrong business. There is only the right or wrong business for you.
So, buying a business is kind of like dating. It's not one-size-fits-all. It's deeply personal, and it needs to be in sync with who you are, what you can handle, and where you see your life heading. The worst thing you can do is dive head first into a business that's completely misaligned with your financial needs, your risk tolerance, and lifestyle preferences. So, before we talk about the what, we need to talk about the who, which is you. So, I want to set you up for success by ensuring you pick the right starting point. Your first task is to choose the level that's best suited to where you are and where you're going because businesses change materially at each level of the game. So they require a different operator, a buyer. Pretty critical you start at the right level. So if you guys want to see what level of business is right for you, then I want you to do this. I want you to make sure you click this download. It will help you figure out the right business for you.
For business buying in particular, it's all about your perfect fit business. So what are you looking at here? You're looking at a ven diagram. So basically three circles here and on each one is going to be something that I need from you before you pick a business. Over to the left we have your passions. These are going to be the things that you love to do that you would do even if nobody pays you. But you don't get paid for being passionate. You get paid for being good. So on the bottom left is going to be your skills. What are you actually good at? What do people ask you to do? What do people ask for your opinion on? And on the right is going to be your network. Who do you know? Do you have an accountant uh friend who actually could help you buy an accounting business? Is your other friend actually a plumber? And so they could help you buy a plumbing business because they would know how to run it. Maybe your dad's a lawyer. He could help you with due diligence. So we want you to fill out this perfect fit ven diagram. And if you do that, you're going to like our next episode. So make sure you subscribe. This is going to be your first step to figuring out the right business for you to buy.
Hey, I have something special for you for being such a loyal listener because you're here with me all the time. I get asked by a bunch of you, how do I tell if I should buy a business or not? Should you buy a business or not? What price should you buy a business at? How do you structure your deal? I got you, fam. So, I'm going to gift you our deal calculator. Every time I look at a deal, I grab the numbers, plug it in here, and see how much money I could make or lose if I did a good or bad deal. So, this is my gift to you. And if you're serious about buying a business, we want to help you. You can talk to my team about if you're a fit for our business buying community or curriculum. No matter what, here's your free gift. And if you need a hand to hold, I got you, too.
Hey, crew. This is so cool. The podcast is growing like crazy. And it's only actually because of one thing. You. I don't know if you know this, but the only way the Big Deal Pod grows is when you share it with somebody else. We don't do ads. We don't do pay for play. We don't go on other people's podcasts and talk about it. So, if you think there was something helpful here, if we made you money, we made you think about your business or life differently, the most beautiful thing you can do for me is share it. And the most beautiful thing you can do for someone that you care about is to share it with them. Help them grow alongside you. So, please share the pod. That's how we grow. And also tag me on anything you share. I love resharing other builders across Instagram, Twitter, and all other platforms. Thank you from the bottom of my heart. You're super important to me.