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Business Built Freedom


Joshua is a late 80’s vintage and yet to mature. He is a living case study that you don’t stop at failure and more failures lead to success. The constant learning and listening have led Joshua to the position He is with the energizing approach towards business and relationships. After setting up 4 successful companies over 19 years he decided it was time to give some of his knowledge back. You are likely to catch him on the water on a sunny day with his family and friends or building something new and exciting at home on a rainy one.

Aug 25, 2020

Buying a Business With Carl Allen

Josh: G’day everyone out there in podcast land and welcome to Business Built Freedom where we build your business and you get to hear other businesses and how business owners have built their businesses up. So today we've got a cool guest on Carl Allen and he's going to be talking to you guys about how you can grow your empire through strategic acquisition and being able to finance your acquisitions without investing any of your own money. So Carl, tell me when is the right time? When's the right moments in your mind where you have that aha moment, I've got to invest and use other people's money? How do you have that mind shift from pulling dollarydos out of your own pocket to grabbing it from someone else's?

Get more tips about buying a business at dorksdelivered.com.au

Carl: Sure. So Josh, first of all, great to be on the show. Thanks for having me. So what's really interesting is most business owners, you know, don't know the process of what I'm going to talk about. So most business owners will start a company and then their only way to grow it is to do it organically. So more customers, more leads, more products and services. They might do some JVs or affiliate marketing with other people. But they typically don't go down the route of, you know, what can I double my business in a day by essentially acquiring another company. So if you've got a $500,000, or a million dollar business right now that's profitable, and it's taken you five years to get to that stage, it might take you another two years to double it. But if you go and find another business of the same size, you combine it with the business that you already have, and you use other people's money to close that deal, then you can effectively double the size of your business and save two to three years of your life by hustling to grow it organically.

And the process is really simple. You know, there's tons of deals out there there's loads of businesses that are for sale for you know, for a lot of different reasons people want to retire, they get bored, frustrated, sick, in a burnt out, you know, run out of ideas. And they decide it's time to sell their business, the business that they've built, and they've made successful. But what's really interesting is people think if you want to buy a million-dollar business, you've got to cut a million-dollar check, and you don't. You can actually get that money from other people. So the first place you can get the money is from the seller. There are some sellers and you might find this strange, they will sell a business and let you pay for that business over time. It's called seller financing or vendor financing in some countries. So that million-dollar purchase, if the business is really profitable, you can pay for that business over time using the profits that the business is generating. The other methods you can use are those trillions of dollars globally of acquisition financing. So if you find a strong business that's got, you know, a healthy balance sheet and it's got great cash flows, then you can use those as leverage to go and get a bank or an investor to give you financing. So you can buy that business, and then you might pay for half of the business up front, the closing payment using that financing, and then pay for the other half of the business, paying the seller over time.

Then there are in some instances where you can actually go and sell pieces of that deal to an investor, to an angel investor or a venture capital or private equity company, who will, they'll partner with you in the deal. They'll co own the business with you, but they'll give you a ton of cash flow so that you can go out and bolt these acquisitions on. Because the bigger you grow your business, obviously the more profitable it's going to be. Businesses, and for the most part are worth a multiple of their earnings. And that multiple increases, as the earnings increases, so it compounds. That's why a small business might be worth three times its earnings. Yet, a public company might be worth 30 times its earnings. The bigger the company, the bigger the profit, the bigger the multiple, the bigger the valuation.

So the bigger you scale your business through acquisitions, the more it's going to be worth so that when you sell it, the higher your net worth and the more money that you put into your own bank account.

Josh: So you've got a bunch of fantastic points, and I have been frantically writing notes here. So ultimately, I guess the metric everyone should be looking at isn't what is something worth its time, because you can have a $500,000 business send it to a million, a million to a 10 million, but it's do you want to have the old not able to use that money and be in a restricted into it in a sense? Well, you know, you're not skydiving or whatever it is that people enjoy doing nowadays. If you're not able to enjoy that wealth, what's the point if it's going to take that long and time, something you can't get back? So, in trying to find a new business, would you look to something that's a mirror business, something that's nearly exactly the same as yours. So you're pretty much buying into the database and staffing systems. Or a Ying Yang, so it's giving you opposing services where they're noncontradictory. But you kind of own the supply chain. What's the process?

Carl Lewis: It is all of the above. So if you own a business, then there are three types of acquisition that you can do. So if you own a software company, for example, then you just go out and buy a competitor. So you can go out and buy a company that does very much the same as what you do. So what you're doing with that is you're just doubling down on your market share. And obviously, you're going to get economies of scale if you've gone from being a $5 million business to a $10 million business. There are a lot of economies of scale when you double. The other thing that you can do is you can buy into your supply chain as you've described. So let's say you own an engineering business and a big part of your cost base is acquiring raw materials and other components. You can go and buy that business because then you're doubling down on your margin. So rather than giving a huge part of your margin to a third party, you're keeping that within your own business. And then you can leverage off what that business is doing with its customers.

But the smartest type of strategic acquisition is when you buy a complementary business, the yin and yang that you talked about. So let's say you own the software company, you could go out and acquire an IT services company. And then you can sell the software to your IT services customers you just acquired. You can sell the IT services that you just acquired to your existing software company. And then as you bring the two companies together, there's a boatload of financial synergies that you can generate. So you're saving probably on premises. So rent, property tax, utilities, maintenance insurance, all the administrative overhead. You only need one financial controller, one HR person, you can consolidate your marketing budgets. So what happens is when you do that combination, it's a one plus one equals three on the revenue side, because you've got the software revenue, the services revenue, plus the cross sell. And then it's on3 plus one equals five on the profit side, because as you're scaling the revenues on the top line, you're stripping out all this duplicate cost. So you can 5X the value of your company, just by doing one simple bolt on acquisition.

Josh: Alright. So if I decided that, hypothetically, I've got an IT company that I'm running and I'm looking to grow this company, okay, hypothetically. Now, if that was to be the case, what would be the next step to using other people's finances to grab a bolt on? It sounds very much like If what you're saying is like a nearly like a joint venture type arrangement where there’s the same client base with his non competitive things that you're doing with each other. So if you were to be buying into the company, how do you go about having someone else say, you know what, that's a great idea. Here's some coin and what's the buyback period? Is that something that's just an overhead?

Carl: Yes. So the first thing that you got to do, it's a three stage process, really. So the first thing that you've got to do is you've got to clearly articulate what the perfect business is going to be for you. Because in your situation, the type of business that's going to move the needle in your empire is gonna be very different to the type of business is going to move the needle in my empire. So you ask yourself those kind of high level questions, you know, what type of business strategically is going to make me do a big leap in terms of the size and scale of my business? Once you've determined that, then it's all about deal flow. It's all about deal origination.

And there are four primary ways that you can originate deals. So the first one is you can go public with Business Brokers. Obviously, that's the easiest method on the one hand, because you know the business is for sale, they listed it with a broker. But it can often be the most challenging because Business Brokers tend to hype up the valuations of the businesses that they're trying to sell. But Business Brokers will get you a big strong source of deal flow. My personal favorite is to leverage one's network, whether it's via social media, or your human network, because what's interesting is only 20% of business owners that decide to sell a business, actually list it with a business broker, the other 80% it will get passed through their network. And when you're a business owner and you decide to sell, you tap into your inner circle. So you'll talk to your accountant, you'll talk to your lawyer, you'll talk to your wealth manager, you'll talk to your bank or an investor that's tapped into your business.

So what I coach my business owner students is how to build those deal intermediary networks and how to leverage them. Get deal flow. And not only does it give you access to deals, you're building relationships with people that once you find a business can help you close that deal. The accountant can help you with the due diligence, for example, to make sure that the business is doing what it says it's doing, and it's in a good place in a good state. And then your lawyer is required to help you paper that deal, to create the legal documents that you need to sign to transfer the ownership of the business from the seller to you, the buyer as the new owner. So once you've got the deal flow, and you've obviously been to see the business, you've talked to the seller, you've got all the information, and you're confident that this business is going to do for you what you think it is, then it's all about financing the deal.

So it's all about structuring the deal, so that it's a win for you and it's a win for the seller. And in most deals, you're looking to pay some of the money at closing and then some of the money over time in seller financing. And then once you know how that is basically going to work, then working with financiers to give you the capital to be able to do that. It's actually the easiest part of the process. There's billions of dollars even in Australia, there’s trillions of dollars in the US, but there's billions of dollars even in Australia, available from bank’s finances and investors to go into the right deals.

And, you know, my simple message to people that want to do this is don't go and buy distressed businesses. Don't go and buy businesses that are instant trouble because you're just in inheriting somebody else's headaches. You want to buy a business that's cash flowing, that as soon as you buy it, and you integrate it to what you've already got, its earning’s accretive, its earning’s positive from that very first day. And what's interesting is, the more the profit, the stronger the business. Yeah, the more valuable it's going to be, but actually, the easier it is to raise the financing.

Josh: Okay. So if you are the seller, I guess and you said is a seller financing or as you also described vendor financing what is short of the seller being distressed or getting out of this part of their life and moving into something else? What is the advantage to the seller and being a put into a seller financing position or selling the business? So why do you see people selling businesses? Or is there a plethora of businesses being sold? I know a lot of businesses, especially with the whole pandemic thing that's been happening, they haven't even considered a broker, they've just gone I don't have any value to sell here. And so they've just closed down and that also interests me, like how many businesses decide I don't think people want to do what I'm doing or I know I can do what I'm doing. I would rather just see it die rather than have someone else kill it, I guess.

Carl: Yeah, it's crazy. There's always value in businesses. You know, the beauty is in the eye of the beholder, isn't it? You know, there might be an IT company out there who thinks what you think that, you know, my business isn't worth anything, maybe I closed it down. But for you, you know, that could be an amazing source of new cash flow because you can integrate that into what you've already got. And you're right in what you said, the number one exit strategy for most small businesses is actually to close the door and turn off the lights. And it's such a shame, which is why we have other dealer origination methods outside of going to brokers. So one of the other methods that we teach our business buying students is the concept of a direct approach. So how you can leverage free business information databases, you know, generate a list of businesses that strategically are going to fit what you're looking to do. And then we approached them.

So we approach them and we say, Hey, you know, here's, you know, I'm Josh, I own an IT company, and looking to scale my business through acquisitions. I've been studying the marketplace. You know, your business is very appealing to me and you tell them why, so you do a little bit of research or you can outsource that to a VA, you might like their customer base, they might have a really cool process, they might have won some awards, you know, whatever it is, whatever reason you like that business, and how it's gonna move the needle for you, you know, you'll bring that into the conversation, or you'll bring that into the email, or you'll bring that into the letter that you might send them.

And then once you've done that, then you start to connect with them, you know, to build some rapport. So there's a really cool couple of hacks that we teach, where we go find them on Facebook, for example. And we look at who they are, do they have a family? What sports are they interested in? You know, do they drink beer? Do they drink wine? Whether they go out for dinner, whether they go on vacation, and then you drop some of that stuff into the conversation. And what you're doing is you're instantly building a relationship with somebody who once they know you like you and trust you, then they're going to be in a much stronger position to potentially want to sell their business to you. And they're thinking of it from the seller side, you'll sit there thinking, I've got this business, I don't really want to work in this business anymore. I don't think I can sell it because who would buy it, maybe I just close it down and liquidate my balance sheet, sell my assets, pay off my liabilities and then just take home the cash that's left, and then all of a sudden you contact them and say, hey, you know, I'm Josh and I'm looking to grow and I really liked your business and you're very complimentary about it. Feels like you know, you've got to know them and what's going on for them and what they do. You know, if I was that person, I'd be like, Dude, come see me. This is amazing. Come see me. I'd love you to have this business. Do you think it's going to really help you? Let's see we can work something out. And then what you find is the more distressed the seller, not in terms of their business, the more distressed they are in terms of their psychology, the bigger component of the deal that they are prepared to put into seller financing. And then, you know, the most common question we get asked about that is, well, what's the risk to the seller if you do the seller financing type deals? So you're not paying them much money at closing, you're just paying them over time. You know, you absorb their business and carry on and make trillions of dollars in profits.

What's to say, you're not going to pay the seller? And what we do in most cases, is it's written into the legal agreements that if we don't pay the payments that we're contracted to make, then the seller just gets the business back. So it keeps the seller, you know, highly de risked in that deal process.

Josh: Okay, and obviously the buyer very engaged to achieve the objectives.

Carl: Yeah. And so it's very different if you're buying a business for the very first time. So if this was your first deal that you were doing and you had no leverage, then clearly, it's only the performance of the business you buy that's going to drive the cash flow for you to pay for the deal. When you own an existing business already, and when we talked before about all the cross selling that you can generate, and all the other cost saving, you know, you might buy a business that’s doing half a million dollars a year in cash flow and your deal as you're going to pay $250,000 of that to the seller over time. If you combine that business with what you're doing, you're able to multiply that where it's generating a million dollars a year of free cash flow, even $2 million a year of free cash flow. So the percentage of that money that you're paying to the seller is a fraction of what is now being internally generated.

And sometimes in a deal, you might have to include a little bit of that upside, because the seller might think well, okay, you're buying my business for a million dollars, and you know, you're going to make $5 million dollars out of this if you do it right. And obviously you're gonna have to do all that work. You know, I want a little bit of that as a bonus, so I want 1,500,000 for the deal, not a million. But I'm prepared to take a lot of that money as an urn out, or as a bonus payment or as a contingency payment for how you're going to scale and really explode the value of my business once you've acquired it.

So all that comes down to kind of creativity in your deal structure. And, you know, we've been talking for hours if I was to walk you through it in detail, which is, which is why we have some free training available for anyone who's really interested in this and wants to understand, you know, what are the eight steps one needs to go through from a blank piece of paper to closing a bolt on acquisition and combining it with what they already do.

Josh: Okay, and I understand that if people did want some training and bits and pieces, you've got a link that people can go. It is trainwithcarl.com/bbfreedom, is that right?

Carl: That's absolutely right. Yeah.

Josh: You guys have heard it. So trainwithcarl.com/bbfreedom if you guys want to have some of that training to see, and I'm going to be jumping They're checking it out. I think it sounds awesome. And I think that hearing about the way that you can structure these deals to make sure that it's a win/win for both parties, some of them sort of feel like they're losing out is sounds really cool. One of the things you actually brought up earlier was an approach that I think a lot of businesses should do. You've got all this information available online. I'd call it stalking. But that sounds weird, but it's not stalking if people have publicly made the information available to everyone else. If you are researching and finding information and seeing are these the target customers or target acquisitions that you're looking for, what would you normally say is the timeline between picking up the pencil and doing the research to the hammer going down on the sale? Is that sort of a day, a week, a month, 10 years?

Carl: So it depends, right? It depends on the size of the business, the complexity of the business, the amount of due diligence you need to do. I've done deals in a day. I've done deals that have taken me six months. So the average is typically about 90 days. If you look at the process of closing a deal, so first of all, you've got to decide what type of business you got to buy, then you've got to do some deal origination, then you've got to go and have meetings, then you've got to do a little bit of analysis about the numbers they'll give you, the type of business, then you've got to make an offer, then you've got to negotiate that offer and get to terms and deal points which are mutually agreeable and a win/win. And then you bring in your little micro deal team, your accountant and your solicitor, your lawyer, and they will kind of hammer out and fine tune the details. They'll do the due diligence, they'll draft the legals, as part of that, then you're raising the financing. And then you're putting together your integration plan. So that as soon as the deal documents are signed, you can get to work and integrating that business into the one you've already got.

So bear in mind, most business owners, they've got other things going on that you know they're running their business already. They're probably looking at other deals. They've got families and all these different things. So on average, it's about a 90 day process, but it can be much faster. But again, that depends on the type of business, type of seller, and what else the buying business has got, you know, going on. If they're rolling out a brand new contract, or there's a whole ton of other things that they're doing in their business to grow organically, that can slow down the process, but on average, it's about 90 days.

Josh: Okay, so with that being 90 days, I guess, like obviously, that that's if a business is about to is they ready to sort of hit the hammer already, sort of that's not a front from inception perspective, I guess you haven't sort of planted the seed and they've gone maybe I should sell the business or something like that. Or I guess something I hear all the time is every business is ready to sell. It just comes down to the finances and the dollerydoos. So is that you contacting cold calling, contracting a business out of the blue that has at that stage no interest in selling to 90 days and they're like where am I?

Carl: It’s the numbers game. So it's like sales, you know, you got to build a pipeline of prospects, some of them are gonna be ready, some of them aren't. You might contact a business, who's had no interest in selling, but then you have the conversation with them. And you trigger various emotions in their mind whether thing, you know what? This has happened for a reason, maybe I should sell maybe I should go and do something else, or you'll be contacting people that are already having those conversations and, and, you know, they don't know where to start, you know, because most people that own businesses never sold a business. About 98% of people that own businesses have never gone through a sale of a previous business. So they don't understand the process or they don't understand the emotions of the process.

Josh: Or its like they just entered in a divorce.

Carl: Yeah, it's interesting, and it's really a game of psychology in a lot of cases because if you take the typical business owner, you know, they started a business say 20 years ago, and they've run that business for 20 years, they've spent more time in that business than they have with their own family. And often, it's like saying goodbye to your children. You know, I know when my son emigrated to your part of the world, my son, Ryan, he moved to Australia when he was 14, so nine years ago now and he's 23 now. You know, when he when I felt like the seller of a business, you know, my child was leaving me to go off to pastures new. And I was highly supportive of him making that move, and it turned out for him phenomenally. He's an Australian citizen now, by the way, and he lives near you in Brisbane. He's a great guy. When he left I have the same basket of emotions that most business owners feel when they sell a business. They want it to go to a good home, they want to know that it's going to be looked after. They want to know that it's going to grow and it's going to carry on, you know, being successful. So it really is an emotional relationship process. And, you know, sometimes you might find the perfect business and it might take six months for the seller to come round to the concept of selling it. But because it's a numbers game, if you have enough quality shots on goal, if you play in the hands of cards, then you know you're going to laser target those sellers that they are ready, they're just waiting for somebody to have that conversation with them. So it is a numbers game.

Josh: I imagine like your training goes into how to as you said 98% of everyone has no idea what they're doing. Everyone had those butterflies in their stomach when they saw the hot girl or hot guy or whatever at school and they went, oh man, I'm going to go talk to them, and 98% of people didn't because they freaked out. And I guess my question is the training of people will freak out about potentially selling their business but as a training sort of put your mind at ease a bit there and put you into a spot that you can say okay, this is how I strategically go about doing this, or is it a helping hand to or getting you the confidence to do that?

Carl: Yeah, so it's definitely not a helping hand. What I do is, it's an implementation system. So it's not a helping hand, it's not theory. It's not just a bunch of training videos, kind of a how to guide. It's an implementation system that's been tried and tested over thousands and thousands of deals in lots of different parts of the world. And you know, in Australia, you know, I've personally bought and sold multiple businesses in Australia. So that system, our deal maker, while society system is the implementation engine for any small business owner, or even any want to be business owner to go and buy a business using other people's money. And one of the other things that we didn't talk about yet is if you buy a company, you don't necessarily have to run it. I own nine different companies. I don't work in any of them. I spend about an hour a week, one hour per week in my businesses. I have general managers in my portfolio businesses running them for me. And yeah, I give them little pieces of ownership, they’re my partners. I want them to be incentivized to do the right thing. So I'm an owner/investor. I'm not an owner/operator. There's a really, really big difference. Yeah, I'd say about half of that. So I coach and mentor about 5500 people all over the world to do this. And they're all doing deals every day, in all different countries in all different sectors in all different sizes. And I'd say about half of those students are buying businesses to operate. And half of those students are buying those businesses to be owner/investors. And there's no right or wrong way.

If you want to be an owner/investor. The benefits are, number one, you can buy businesses anywhere in the world. So I own businesses in Australia while I was living in the UK. It's a bit of a journey. So obviously, it takes two days to get there. So I'm not going to commute to that business every day. And it means you can own multiple businesses, you don't have to stick with one. If you own multiple businesses, then you don't have to work in every month. It's like getting an executive salary from every single position you own and you stack them. You know, there are benefits of, I guess, being an owner/operator or a business. Some people just like running a business. They like being there everyday. They like that tactical day to day, you know, working in the business. And then there's a hybrid, you know, you could still work in, you can still be in your business every day, but you know, but work on your business. Be the guy that sets up the strategy, be the guy that's all about the planning, be the guy that's all about building those high level, needle moving relationships, and then let your team do the day to day technical, tactical work that execute the plan and the vision that as the owner, you've set up. So there's no right or wrong way. But, yeah, it's all about doing deals. It's what the Wall Street guys do. That's where I grew up. You know, I spent the first 16 years of my career doing large mergers and acquisitions for Wall Street investment bank and for big corporates, and that's where I learned the process.

And the mechanism we use, Josh, it's a fancy banking term, it's called an LBO leveraged buyout. So some of the largest companies in the world have been bought and sold through a leveraged buyout model. And a leveraged buyout is you find a business you like, and you just by using other people's money. One of the largest leveraged buyouts in history, massive American company called RJR Nabisco. It was bought for $25 billion in the 1980s. There's a great book about it called Barbarians At the Gate. A must read for any wannabe deal maker. That business was bought for $25 billion. The guy that bought it didn't spend $1 his own money. He’s packaged that model down for the small medium enterprise. It's the same process, just on a much smaller scale.

Josh: You stole my final question, which was what would you suggest someone to read to further understand their knowledge of what you do and that's, you've explained it. So make sure to read barbarians at the gate. It’s fantastic. I've really enjoyed having you on the show. And if anyone does have any questions are the popping through on the reviews for us on iTunes, or otherwise jump across to trainwithcarl.com/bbfreedom for more information and to get some training underway. Before we close out there, Carl, has there been anything else you'd like to cover off on?

Carl: No, I think we're good and I'm happy to come back. If you want to do a part two. I think there's a lot of extra stuff we didn't dive into. We've got some Australia connections between us. So, yeah, if the listeners really resonate with this. They want us to go deeper on some of the other issues, then I'm happy to come back, dude.

Josh: Absolutely. Well, I'd definitely be interested to do that. As I said, like it, you've got a wealth of knowledge there. And I think a lot of people will be very interested in hearing this, especially around this time, where I think a lot of people might be sitting on the fence is what zombie businesses is the main goal coming out in the cracks around the place. So I think there's a really good time to be considering this with different people's mindsets shifting. It's kind of like if there was to be a new year's resolution. It's kind of like we've had three months to think about it instead of one night. So I think we're going to be seeing a lot of changes very, very good, good information. So if anyone is interested, make sure to jump across to trainwithcarl.com//bbfreedom.

And yeah, otherwise, go over to iTunes. Leave us some feedback. Give us some love and everyone out there, stay healthy and stay good.