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What do I love about: Buy Then Build?

Practical Practical Practical!!!

This is one of the most practical books I have read. The chapters are developed to guide you through the process from the time you decide on acquisition entrepreneurship. I particularly love that I can quickly estimate how much a business is worth and also figure out how much I can afford to buy a business.

What do I not love about: Buy Then Build?

Zilch

Who should read: Buy Then Build?

Anyone interested in acquiring or starting a business. Anyone with some entrepreneurial fire.

Who should not read: Buy Then Build?

If you do not care about entrepreneurship

Notes about Buy Then Build

CHAPTER 1: DON’T START A BUSINESS

Peter Thiel often ask what important truth do very few people agree with you on? Ambitious entrepreneurs should buy existing company and use it as a platform to build value, rather than start a business from scratch.
99 percent of all startups either fail completely or never really amount to much- financially or impactfully.
Acquisition entrepreneurs start by buying an existing business instead of starting one from scratch. From there, they bring an entrepreneurial approach to build value. The combination of an existing small business profitable and sustainable infrastructure with the innovation and drive of an entrepreneur is magical recipe.
Companies under $10 million in revenue tend to sell for lower multiples than middle-market or publicly traded companies, a $65k investment, paired with a 90% loan backed by the small business administration, could buy a company generating over $1 million in revenue, immediately launching an acquisition entrepreneur into the role of CEO of one of the largest 4% of companies in the Us.
Gazelles are defined by rapid growth and not size.
By 2021, baby boomers will be retiring at a rate of 11,000 per day. Almost 77 million people, about 20 percent of the US population are going to retire between 2013 and 2029.

CHAPTER 2: ENGINEERING WEALTH

91% of everyone having over $5 million net worth owns their own company – a trend suggesting that the wealthier someone is, the more likely they are to own a business.
When evaluating a potential acquisition, the cash flow the company generates is what sets the sale price of the company. It is the driver behind the valuation and ultimately what you are paying for. Anything outside of the company’s ability to generate cash is commonly not worth paying for at all. At its core, what you are buying is an asset that provides cash flow.
SDE-Sellers Discretionary Earnings represent total pretax cash flow benefit of the owner of the company.
You make money when you buy not when you sell.
Vehicles of return on investment is cashflow and appreciation.
Perhaps this is the real wealth we all want- the purpose that comes along with creating value in your life.
For a true entrepreneur, financial independence has been reached the moment they take ownership of a company or an idea, from the very beginning, because there is no separation between work and life. It is the same mission and the same time.
Set your mind on a definite goal and observe how quickly the world stands aside to let you pass.

CHAPTER 3: THE CEO MINDSET

The building block of how to build a company and a vision don’t come from what’s “on the menu” but from aligning their ATTITUDE, APTITUDE & ACTION and leveraging that alignment toward a specific opportunity.

ATTITUDE

People with fixed mindsets have the core beliefs that reflect it. They believe in limited resources; they believe that people have an innate and fixed level of intelligence, and that effortless success is the badge of the truly talented. Whereas a growth mindset is one that views the world as more malleable, believing success is achieved through effort.

APTITUDE

Achievement means just that- people driven by achievement in their lives in order to truly flourish as individuals.

Most entrepreneurs are highly achievement-driven. Psychologist Henry Murray devised a characteristic that he called “the need to achieve”, which refers to an individual’s desire for significant accomplishment: intense, prolonged, and repeated efforts to accomplish something difficult.

Those who are dubbed “high achievers” are those who are motivated almost exclusively by the personal satisfaction that comes with accomplishing hard goals.

ACTION

Are you a visionary or integrator or focus on revenue vs. operations

CHAPTER 4: DEFINING THE TARGET

Map opportunities to two quadrants: growth or value opportunity
Is the growth opportunity that you need to build a sales team? Improved marketing? New distribution channel? Financial engineering? Operational improvement? Or a customer base
The purchase price is derived by paying a multiple (M) of SDE
Working capital will include AR – AP + Inventory.
SDE typically ranges between 10 to 20 percent of revenue.
All business can probably be identified as offering a product, acting as a distributor or providing a service.

CHAPTER 5: THE SEARCH

Skip the internet, don’t commit to one broker, and don’t depend only on listings.
Record industry, location, revenue, asking price, and any other critical or comparative information you can use later.
If you have enough money to buy a company in all cash, great-this is easy. If you don’t, it’s critical that you have an equity “backer” set up before you begin your outreach to brokers. If you don’t, you will destroy your first impression with the key people you will need to help you execute.
When you look for a broker find out if the firm validates any information? Do they review and vet listings? Do they specialize in certain industries? Who else do they know that can help you on your search? Does the broker have business management experience? are they a licensed broker? How are they compensated?
The truth is every business is for sale, and you can do the bird-dogging just as they can.
Not only does time kill all deals, but the opposite is true as well. Moving quickly will move you to the frontrunner position as the acquirer, eliminating other potential buyers.

CHAPTER 6: DEAL MAKING

Banks look for a minimum debt ratio of 1.25
When you are meeting with M&A advisors and bankers, be sure to ask whether they have recommendations on CPAs and lawyers they like or have experience going through the process with.
Ask the CPAs if they have experience representing both a buyer and seller, size of transactions, whether they have a due diligence checklist or if they were to make one what would be on the list.
I always negotiate a “not to exceed” budget with my attorney.
Like the CPA, I ask for the ability to pay after the deal has closed so I can take the tax benefit or treating it like a business expense.

CHAPTER 7: BUY FOR THE FUTURE, PAY FOR THE PAST

Know if the statements you are reviewing are on a cash basis or accrual basis.
5 areas of specific importance you will be wanting to look into: Revenue, profit, operational efficiency, cash flow, Seller Discretionary Earning
The rule of thumb is that no customer is greater than 10% of revenues
Markets change all the time, but most main street business will sell for 2-3 SDE, while most lower middle market companies under $5M will sell for 2.5-6 depending on a number of factors.

CHAPTER 8: SELLERS JOURNEY

Negotiate everything you can other than price before you make a formal offer
If the seller is bored, chances are all the employees are bored too.
The seller will be critical during the acquisition process and the first month after closing, but usually not much after. Their emotional connection is gone.

CHAPTER 9: DESIGNING THE FUTURE

Most businesses in the world do not have a significantly unique offering. Instead, it is more common to rely on differences from competitors.
The treat of new entrants refers directly to Warren Buffet’s concept of the “Moat”
Run through Porter’s Five Forces, the industry lifecycle and underlying trends will help give you a sense of where to look for this future challenge
There are 3 levels of business strategy: corporate (the mission, vision and values of the organization), competitive (who the customer is and why they would buy from the company) and growth (diversification, product development, market penetration and market development).
The Hedgehog concept points to an organizations ability to continually make decisions based on an underlying crystal-clear understanding of the intersection of 3 areas and achieve superior economic returns as a result. Those areas are: 1)what you are deeply passionate about 2)what you can be the best in the whole world 3)what best drives your economic engine.

CHAPTER 10: MAKING AN OFFER

I prefer to keep real estate investment separate from business investments.
I address the real estate dilemma by agreeing to a 3-10year lease with the option to purchase the building at the end of the term. This is ideal for you as the buyer because, after you run the business for 3-5 years, you will know whether the real estate makes a good investment opportunity, depending on the tenant- You.
Ask if possible, for 90 days of onsite seller training and an additional 6 months available by phone.

CHAPTER 11: THE ACQUISITION PHASE

Make sure you discus with your accountant how the allocation of purchase price impacts you so that you know the difference between where you want the allocation and where the seller will want the allocation.
Results are gained by exploiting opportunities not by solving problems.
We experience the strongest positive emotional response when we make progress on our most difficult goals.

CHAPTER 12: TRANSITION

My take on inventory is very straightforward. I buy anything that will be used in the first 90 days after closing and I don’t buy an incomplete product.
Throughout the process keep advising the seller to run the business as if it weren’t going to sell.
Initiate an overall cleanup of the facility. Most small companies that have been owned by the same person or people for decades are in need of tidying.
Cleanliness sends a good message to the employees that you care about the place and want it to look nice.
The only exception to a short sit down is with any salespeople. Ride with your salespeople instead. Understand how they work and what the marketing message is.
Growing through acquisition can make more sense than trying to grow organically through sales effort.
To grow, you need to get more customers, or you need to increase the order frequency you have, or you need to increase the average order value per customer.
Baby boomers who own more companies than any other generation in history, are retiring in droves- $10 trillion in business value will need to change hands with the highest volume of opportunity in business below $5M in revenue.
The convergence of these historical moments of entrepreneurship defining the economic frontier, and the retiring baby boomer tsunami presents a unique opportunity for those ambitious enough to tackle acquisition entrepreneurship.

Buy Then Build. Walker Deibel