David Buys a Business and Puts a Manager in Place for Passive Income | How to Buy a Business

I got a question from a Youtube subscriber who asks David when you were a business broker why did you never take advantage of a great company and hire an operator to manage the company and receive residual income well I kind of did let me tell you the story hey there it's a David Barnett from David C Barnett com the blog site YouTube channel iTunes podcast where I talk about buying selling managing financing small and medium-sized businesses and basically any other questions that people want to send in this week I've got a great question it was a multi-part question I'm just gonna do this one piece from a viewer on YouTube who kind of laid out a few questions there for me and it said basically if you had all these people you know wanting to sell their business coming to see you why didn't you buy one and put a manager in place and you know it's it's it's a really great question but I can tell it's likely a question from someone who who doesn't have a lot of experiencing in managing a small business so let me give you a little bit of insight because I work in the world of small businesses and I know all kinds of people who own them I continuously hear the stories of what it's really like to own one of these businesses and it doesn't matter how great the management is that you're able to hire because there's a limit to how great the management is that you're able to hire let me give you an example in my town here there is a coca-cola bottling plant okay so coca-cola is a big company and that plant obviously is not being managed by an owner because the owners are the shareholders they're all over the place right so they found someone to manage that plant now let's think about that guy and I don't know who it is but or maybe it's a lady they're probably somebody with a lot of experience education they've been with the company for a long time maybe they've worked in different plants they are committed to a long-term relationship with that company and they probably earn a really good salary right I mean managing a bottling plant for coca-cola is probably you know well I think it would obviously be over a hundred thousand dollars a year for that person and so that person is building a life vision for themselves based on the idea that they're a plant manager for coca-cola and they're vested in the you know retirement plan and all that kind of stuff so that is a winning person with a vested interest in the long-term success of the company and they're going to put in the extra mile because they have equity in their career okay so they a lot of these professional type people and I used to work in big businesses so I know a lot of these people they treat their their job has something a little bit different than a job they call it a career because they believe that it has some of the same kinds of properties as business ownership that if they take care of their career their career will take care of them etc etc and I know this channel is filled with people who've been through that I know that it's all you know an illusion we're not going to go there right now but now let's look at small businesses so small businesses typically don't have the same kind of resources to hire that same kind of manager and people who work in small businesses may really enjoy it they like their job etc but they know that the long-term future of the small business is not the same as the long-term future of coca-cola right and so it's more difficult to get long-term deep buy-in from an employee in a small business and because small businesses typically don't have the same resources like I know many small business owners who have managers and they pay those managers like 40 grand 45 grand 50 grand decent wages but you're not going to get the same kind of person that's managing the coca-cola plant for forty or forty five grand you're just not and so even though they have these managers who are taking care of the day to day things the business owners are still involved on a regular basis I know one guy in particular who owns a restaurant he's got a manager he still spends five to six hours a week at the location reviewing documentation reviewing numbers etc even though he doesn't serve a single customer and he doesn't talk largely to anyone other than the manager and a couple of other key people who do things like counter inventory for him so it's it's difficult to buy a business and just say hey I'm gonna put a manager in here and I'm gonna run it from home it's hard in a small business world so that being said let me tell you the story of the time that I actually did do this because I know you want to hear the story so one day when I had my business brokerage office lady came in and she had decided that she was sick and tired of her business and she just wanted out and I started to look at her financials I started to talk with her about her business and I knew that it was something that I wanted to buy and I knew that it was something that I had a manager already lined up for okay and so that raised an ethical question if I take on this client if I take on this business owner as a client then I'm entangled in all kinds of fiduciary duties and responsibilities to the client so I can't you know present myself as someone who's going to help them sell the business and then turn around and take all of that information and knowledge and as well as my you know expert status and use all that to negotiate against them to get the best price for the business right it's it just isn't something that I would do it wouldn't sit well on my conscience so in the moment I realized that it was something that would want to buy I actually said to her I think that this might be the right business for my wife and I and I was married at the time and so I said you know would you like me to take a look at these numbers and bring you an offer and if you and I can't make a deal that I can still we can then look at moving forward with me trying to help you sell it to somebody else would you like to do that and she agreed and so she left her financials and things with me and I went home to talk with the manager I was going to put in place who of course was my wife at the time and she was not happy in her role she was a supervisor you know customer contact environment and and complained to me all the time about how she was dealing the employees there and how they all seem to be acting like they were still in high school and stuff so she wanted over that environment I thought this was a good business and I knew that she had the aptitude and skills to manage it properly so I'm on home talk with her about it and she was interested and so what happened was my wife bought this little business and I helped her we took it over and the whole idea is if you've seen the video about my life as a business broker you know one of the challenges of being a business broker is that be up and down and up and down with cash flow and so what this business had is it had a slight seasonality to it there were about 2 or 3 months of the year that were slower than the rest but in general it was a pretty even cash flow in this little business and for the most part my my wife was gonna be able to run it by herself with some help at different times a year and so we bought the business and it worked pretty well you know what though even though the person managing the business was my wife I still it wasn't able to get myself out of it so I still had to spend time there every week so I used to have to go there and cover the shop when she had things like doctor's appointments because for the most part it was a one-person operation I had to go there and do the bookkeeping because she didn't want to and didn't have the knowledge and skills to do it properly and I knew that if the books got mixed up and mixed up I was the one who's gonna have to sort them out so I became a bookkeeper as well and so even though it was supposed to be an acquisition as the questioner says to create passive cash flow it wasn't passive I was still involved there and at the end of the day of course the cash flow wasn't really mine it was my it was my wife's and then later when our marriage broke down and it was decided that we were gonna split up one of the issues was that I had put money into this business and she knew that she was gonna have trouble running the business without my support and so it was decided that before we could split up and get divorced we'd have to sell the business and so that became part of our marriage dissolution plan step one sell the business so that I could get my money back out and she would have a lump sum of money that would help set her up in order for her to go and get a job somewhere so great question it allows us a little bit of insight into some of the realities of these small businesses most of the time when we're talking about a small and medium-sized business ownership and management are the same and for very good reason you need to have your hands on things and there's another video that I have produced before where somebody had asked me why don't own or simply hire managers when they want to retire it's exactly the same thing they they could do it but they still wouldn't really get away they would still be involved at some level all the time anyway if you're interested in buying a business then you should head over to business buyer at Vantage calm and sign up for my online course it's nine and a half hours of video instruction teaches you all about how to buy a business it's the least expensive way to spend nine and a half hours with me and what makes it better than a live presentation of course is you can keep going back and you can replay things and as you're going through the investigation of a business that you find you can keep replaying the modules and and refresh your mind about what's going on at each stage thanks for joining me it so it's been a Plast as always we'll talk to soon bye

Channel: David C Barnett Small Business and Deal Making SME

Views: 57,443

Keywords: business broker, smallbiz, small business, small business management, passive income, how to buy a business, how to buy a small business, investing in small business, passive investing

Id: JEUCHjSFvBo

Length: 10min 15sec (615 seconds)

Published: Fri Feb 02 2018