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Review from Rich Dad Kieth J Cunningham's seminar day 1: How to buy and sell a business


Why should you hold out for a business for sale instead of starting from scratch and building your own one? Kieth Cunningham explains how it works in this video:

If there is aย Business for sale, how does the amount of cash in the bank or debt (credit from the bank or an investor) change the value of a company?
Calculating based on a multiplier based on earnings means the transfer is made clean, that it gets sold with zero cash funds and zero credit.

In the US there are 3,200,000 businesses for sale.
In other countries it is similar, but you need to adjust them to the population (US 340 M), e.g. Australia 25 M. about 8% of 3.2 M.

The baby boomer generation will transfer their businesses in the next 10 years. Currently, we are looking into a buyers market. Due to that prices might go down, because much more will go on the market.

Google for: "Baby boomer business selling report"
Sellers have to do the financing, banks won't give credits for estimated earnings in the future. That way you make sure, that the seller will hand it over in a constructive manner, to keep it profitable for the future.

For buying a business the bank is willing to leverage it like real estate.
Managing people, choosing the right staff, and motivating them is the key competence.
The complexity is a bit higher than buying real estate but easier than the stock market or starting a business.
Financing availability is as good as buying real estate.
Liquidity is bad but better than starting your own.
Barriers to entry are high.

Existing business seems like there is less risk due to:

  • actual results
  • revenue, cash flow, and profits
  • trained employees
  • brand/customers and clients
  • experts training/system
  • financing options

Where are the risks in the business for sale and how to avoid them?

Acquisition principle 1

  • Investing is about the future, and the future is unknown, unknowable
  • another word for investing is risk analysis and risk management
  • understand, probability, control, cost
  • e. g. hiring people: You can influence if an employee stays longer or leaves earlier your company, but you cannot control it.
  • not all risk is created equal, see: page 253

Identify all things that could go wrong

Make the best guess for each risk
1. Probability
2. Cost
3. Controllability: make a top 10 list of the highest probabilities
Use bubbles for the top 10, the higher the probability the bigger.

Draw a graph
y axis = cost
x axis = controllable, manageable, uncontrollable

Put the bubbles on the graph.
Think about the bubbles on the top right corner = the triangle of death,

Think about ways, how to

  • make them smaller to reduce the likelihood
  • move them down and move them left, to reduce the cost
  • make them controllable and get more control over them.

E. g. You may reduce the risk of a key employee leaving the company, by making him a partner.

When investing, we are getting way too optimistic. We need to be able to live with the risk. Is the risk worth the reward?

Thinking positive and enthusiasm is your enemy when it comes to investing. Business ownership is an intellectual sport. Other than Business operation, which is an emotional sport.

Start your thinking time with a good question.

  • What can go wrong?
  • What happens if ...
  • Where are the glitches?
  • How would I run my business, if 100% of my customers would come through referrals?

When it comes to buying a business, it is pretty easy, but if it breaks, it is very hard to rewind it.

Growth Achievement Process G.A.P.
Goal/Outcome/Standards = what is point B, where I want to be.
Make it non-negotiable, otherwise, it is wishful thinking.
Reality = point A, where I am at the moment

The gap between points A and B is a symptom, not the problem.
The problem is what stops me from moving! In thinking time you need to separate the problem from the symptom. And build a machine that removes the problem. Building a machine, that workes on the symptom are a waste of time and money!
We do not try to get perfect, just get a little bit better. Try it out and see if it moves in the right direction. If so, keep on making progress in that direction. If not, change the approach until it goes the right way.

Having standards instead of goals creates immediate results. and a standard means that you have a system that creates a constant result. Being better than the standard is always possible, but they are nonnegotiable bottom lime. Standards can always be increased.

Thinking time is introvertive progress that you do on your own.
A mastermind is good but it does not replace your own thinking time.

It is pessimism, it is about being skeptical!
Pessimism will lead never into a deal. Being skeptical is something different, it is just questioning the risk.

Being emotional leads to becoming enthusiastic and making poor decisions.

Statement from Warren Buffet on page 87
G. U. T. vs. intellect
emotions = excitement
intellect = evaluate
conflicting thoughts

If you are making a financial decision, you need to be able to think of conflicting thoughts.

The quality of my decision is directly proportional to the number of conflicting thoughts I can comfortably handle.

The success of a business is NEVER really about the product! Because it is NEVER what you do, but it's how you do it.

The key is, where is the gap in the market?
Where are the frustrated customers and none of the competitors does something about it?

Which basic need needs to be satisfied?
FOWTW = Find out what they want?
EAGI = go and get it
GITT = give it to them
e. g.: Accor hotels offers to check-in from 8 a. m.
This is attractive for international travelers, they charge a premium price, and they are always full.

Peter Trucker writes in his book Managing of Products:
Find the pain, market the solution, and selling becomes seamless.

Mastery = rules

  • when you are stupid in small things, you are stupid in big things
  • speed kills = value vs. growth
  • core competence - know your boundaries: If investing outside of it, you are gambling! Where are opportunities inside my competence?

Learn out of your core competency to increase it steadily, but always invest inside.

4 things the CEO cannot delegate

1 obstacle and strategy:

what is the real problem?
What are my three biggest problems?
No visibility, no sex today, not enough space to expand.

Those are all symptoms!
What is the gap? How can I close the gap?
That's why I need to know, where I am and where I want to be?!
What is the real problem?

Ordinary things that are done consistently, produce extraordinary results:
What can I do to improve my situation?
Do you want me to be a problem or an opportunity?

Smart people have good answers
Genius got good questions
Ecorse the answers keep changing!

Questions for thinking time:
What is my ideal customer?
What must happen to buy from me?
What must happen to keep them buying?
What could cause them not to buy from me?
Perceive a risk, something terrible could happen.
Friction: Hurdles to change suppliers.
Don't perceive the difference that makes a difference
Lack of certainty of success
How would I have to run the business, so that customers would say: I would be crazy to buy from someone else.

2. CEO: what you prioritize

What is the machine you build to overcome obstacles?
What is the major issue to work on for the next 90 days?

3. Design of the Business model

Deliveries and monitoring future
Attention on the allocation of resources
There are only two reasons to spend money on business:
Keep customers, gets people to notice that we care!
Getting new customers, get people to notice what we do!

4. Structural/organizational chart

Opportunity without structure equals chaos
The price for entrepreneurial success is the structure
What is the thing only I can do?
Get A players, then ask: what can I learn and do today?

5. The culture of the company

- Abstinence of trust
- Fear of conflict, we don't care enough
- Lack of commitment
- Avoidance of accountability
- Attention to results

The benefit of value is what the customer can experience:

  • Brand
  • Relationship
  • Features

People and culture are the number one in the company:
So that they make sure good customer service will be delivered
Get the people and culture right to archive a 60% increase in profit in six months!

Kieth's cultural rules:

  • Do the right thing
  • Do the best we can
  • Show the customers that we care

Having the right people brings the right results!

How to find an excellent manager and operator for your business?

Who is the number 2 CFO at your competitor as an employee? Which cannot become number 1? She/he is already trained, a specialist in the industry, willing to leave anyway to make progress. So making him an offer can be a good symbiosis.

Phantom bench

If some of my key employees leave. You need to know which other A-players are in the industry as a replacement.

Write your Management philosophy, that includes my strengths, weaknesses, what I expect, and how I want people to work with me. Share it with your employees and have them agree on it.

I am not willing to lower my standards to meet your needs for average!

The 6 big risks

1. Concentration risk - one major customer or supplier, key employee, single marketing line
2. Sustainability: What could disrupt the future risk of earnings?
3. Business Model: personal training might be replaced by online, what kind of training do people.
4. External factors: The number of people having a driver's license is going down, it won't be required anymore with autonomous driving vehicles.
Every vehicle has some gasoline inside if a car burns and it hits the tank, you are in trouble. Where is the gasoline tank in your business?
5. Leverage:
- How much debt does it require?
- The quality of people on your team
- Culture
6. Excess Capacity / Underutilized assets

If having a production line,
A can produce 10 units
B can produce 5 units
C can produce 100 units a day
B is the constant, that limits the complete output to 5.
Cs overcapacity costs money, it could be tailored or the overcapacity can be sold as a service to another business.

The limiting factor in my business is the number of available rooms. To grow, we need some more space.

How to qualify a good business for sale?

- PUD = put up demand, a long list of leads, lead generation
- Aspirin vs. vitamin = a painkiller sells itself because there is pain. Vitamins need much more effort to sell because there is no urgency.
- Market growing? The fastest-growing companies are operating in the fastest-growing markets
- Find/close customers cost-effectively? How long is the sales path?
- Moat brand / Tall Bridge / Secret / "Real Estate": is there something the brand owns like real estate, e. g. Volvo = safety on which they can build on, which allows them to increase prices. What is the market thinking about it?
- Management (single point of failure risk): Is it all depending on one person? sustainable business model: Sales, expenses, a point of failure, concentration, financial warts, qualifiable & stable risks
- Improvement / growth / "gap" instead a "me too". The key of a franchise is the brand and the logo which attracts the customers, it is not the manual! The system avoids, that your competitor is across the road. So even if it is a "me too" from the process, but not from the location. More about this in the Book: "The hearts inside" by Donald Miller
- Unique + Valuable (Brand = reputation) If you want this, buy from us. If you want that, go to x,y,z.
- Committed Seller

- Protect me from me, because I wake up every day and think, how can I wreck my life. Experience is what you get when you didn't get what you wanted. (Log the lessons learned)

1. Deal flow: get continuously new offers, it is the only way to way to find a good opportunity, it creates a lot of work, that's why a lot of people don't do it.
2. Pay for the past, but buy for the future. If the seller wants me to pay for the future. Give it back to him, and let him show the results, then you buy it.
3. Identify the risks (no such thing as a perfect business)
4. How will I grow/sustain it?
5. Critical drivers: find the causes for the missing KPI.
6. What can KILL it?
7. Don't fall in lof with the deal or product
8. "en"-gaged investor vs. owner

Kieth's 11 investing rules to protect him from himself
1. within my core competence: basic, simple, can I explain it?
2. invest in my backyard
3. less than 20% of my net worth incl. dep guarantee
4. margin of safety can overcome 25% sales drop
5. competent management that requires little of my time
6. minimum of 10 years old, avoid quickies/ fads and market timing
8. my strengths will support the business
9. avoid turnarounds
10. avoid partners
11. avoid start-ups

2DO: Adapt them to me!

Analyzing business for sale rules

1. management
2. historical performance
3. tends
4. competition
5. margins
6. WDIS? What could go wrong ( Pre-Mortem)?
7. Capital requirement... sustain and grow (Free Cash Flow)
8. industry information
9. ROA: is the risk worth the reward? (Can I live with the downside?)
10. Too good to be true?
11. Sellers and brokers lie!

Be aware: If the lips of a broker are moving, they are lying! There is no exception to this rule. There is no regulation, test, certificate, ... This is the only deal they ever do with you. Sellers lie in a different way, they know where the problems are and they try to bend the truth to make their business look nicer. They bring sellers and buyers together and they help the buyer to get to closed the deal.
So you need to listen, think, and verify.

Warren Buffett's Rules and Thoughts:

He writes his yearly letter to shareholders since 1996. Read them to learn about what he thinks about:
- Technology
- Geography
- High gross margin
- Demand and repeat
- Differentiation moat (not price)

4 Acquisition rules

1. Performance

consistency of performance
- quality of management execution intelligence
- value vs. growth
- value vs. price
profit margins must be big
- control/difficulty to maintain due to competition or regulatory
free cash flow
the big 5 financial growth indicator

2. external

- competition
- industry trends
- economy

3. future

sustainability, stability, and predictability

4 risks

what could go wrong
- single point of failure?
- lingering liabilities?
- what must happen for success?
- what drives sales? Engine and critical drivers?

Price commensurate with the risk
If it's too good to be true, be skeptical, why and how did it get to me, why didn't the ones who got to see it before I, buy it?
Ask, listen and verify with facts vs. assumptions.

2DO: Use this to create rules for myself!

Vetting the opportunity

1. What exactly is the business? Not the product, which is the basic need it satisfies?
- offer vs. do
2. who exactly is the target customer/market/audience?
- whom do I want to buy from me?
- what must happen to make them buy?
- what can stop them from buying from me?
- what makes them coming back?
3. what exactly is frustration or pain?
4. who exactly is the competition?
5. how exactly doe the customer define success?
6. what exactly is the go-forward plan strategy?
7. what exactly has been the consistency of execution? management
8. What exactly will be measured?
9. What exactly needs to be corrected?

Two sources of value
1. assets
2. earnings
earnings * multiple

A business with assets of 1 or 1.000.000 in assets and earnings of 1.000.000 got the same value of 3*1.000.000!
Cash and debt belongs to the seller and the company gets transferred "clean"

Exit: An attractive opportunity is the same as before for buy!

CEO, owner, leadership
- resource allocation = outcome
- execution, follow-through, results, measure
- improvement, growth, excellence
- culture, morale, trust, safety
- the posture reality, call it tight, accountability

Nothing's gonna change until the unsaid is spoken.

2DO: Action items
- develop my rule
- define target industry, size, geographic
- start researching
- start dating, deal flow
- start financing, the best time to raise money is before you need it! The bank, investor or partner feels that I don't have a high need. Get a letter from the bank stating that they are willing to finance the deal. It gives the seller the comfort that it makes sense to talk to you.
- snapshot scoresheet

For Sale
- tired = their
- health
- retirement
- new opportunity

Targeting the deal
- industry
- geography
- type
- size
- purpose
- active
- partners

Deal sources
- why do you shop?
- networking
- industry or trade publications

- costs 7 to 10 % for the seller
- they are an agent only for the seller
- they act like real estate agents
- they just move documents between sellers and buyers and avoid that you get to see the seller, like real estate broker, do. But a business is not built from concrete, it is a living system.
- commission-driven, only want to close
- integrity
- ask for an offer before I have a look
- experience
- listings
- specialization
Get the name of the business before you sign the NDA

Roles for brokers
- ask for NDA
- ask for a financial statement from the bank
The best business brokers are local, not national or international

An international broker is "sunbelt"
you can search for a region, price range ...
cash flow is usually EBITDA and it is polished
every given information is before negotiating
- the key to getting the seller to give you credit, you need to become the son he never had. You need to have him fall in love with you.

Find some offers, go for dates and fuck them up, just for fun and experience.
The worst investment you can make is a minority in a privately held company.

Your favorite word in the negotiation: Help me understand ...
Next will be your favorite word ... "swipe left"!

The price offered price is between 3-5 times the yearly earnings.

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