Episode Summary – Buying a business-where to begin?
Where to begin buying a business? The place to start is with You!
This is the 2nd in the series of our interviews with Pete Seligman about buying a business. In episode 13 we identified self-awareness, cashflow and the many great businesses that are available as reasons to consider buying and not starting a business. Today Pete explains where to start the process of buying a business?
Links and resources
Podcast Episode 13 – Reasons to buy a business in 2020 not start one
Podcast Episode 2 – You-360 What do I really want?
Podcast Episode 3 – Understanding Your Motivation to own a business
Alpin – website
Pete Seligman- LinkedIn Profile
Episode 16: Buying a business – where to begin?
This is the second episode on buying a business as an alternative to starting a business. So in episode 13, Pete, we discussed, some reasons you suggested such as self-awareness – some people are just not startup people. You also explained the benefits of having positive cash flow from the outset. And we also discussed the fact that COVID is going to provide opportunities at a time when there are lots of baby boomer businesses who are looking to exit. So with that said, let’s say our listeners are interested where on earth would they begin?
Episode Related Resource Stack
Podcast Episode 13 – Reasons to buy a business in 2020 not start one
Blog-Thinking of owning a business-would you be successful?
Self Assess Your Readiness with our Business Readiness Test
Blog- 5 reasons why great ideas fail
Podcast Episode -You 360 “what do you really want?”
Pete Seligman – LinkedIn Profile
Pete Seligman – Alpin
Begin buying a business with some self reflection
It’s a great question and where to start can always be a challenge with many things. I think that where you need to start is with yourself, frankly. Sounds a bit cliche, but really understanding who you are and what you want is going to be an important input to your decision-making process. And if you start either looking for or even acquiring a business that isn’t based on:
- who you are
- what your interests are
- where your strengths lie
- what your aspirations are,
then you’ll come unstuck pretty quickly.
Those subjects are in our episodes two and three. They were right at the beginning of our pathway because we share the same thinking because we’ve heard this over and over again both from people we’ve met and we’ve worked with. You’ve really got to understand yourself. And we do that from what we call a 360-degree perspective. We give people a tool to do that, and also to explore what their motivations are. The word sounds the same, but the actual motivations to individuals are radically different. It doesn’t sound cliched at all; we think that’s absolutely spot on.
Episode 2 – You-360 degree- What do I really want?
Episode 3 – Understanding Your Motivation
Great. Well, I’m glad we’re aligned on that, and definitely, people should listen to those episodes because I think spending some time sitting with those questions can be very valuable. And I know that in my own experience, there have been times when I have done it, and it’s been a valuable process. There have been plenty of times when I haven’t done it. And then down the track, I suddenly realized why I should have.
Brendan So “why am I doing this”?
Correct, you end up either in a business that isn’t aligned with where your interests or passions lie, which makes it very difficult to make it through the hard times, which always exist. There’s always hard work involved. And if you don’t have that passion, aspiration or interest, then those difficult periods will be magnified. It may mean that you’re less aligned with either the people in the business or the co-investors that you get involved with. So I think really understanding yourself to me that comes down to what are your strengths, what are your interests and what’s your aspiration? You know, where “Where do you want this to take you?” We talk a lot about the owner’s mission in our business and with our clients. And I think to understand that these investments or these businesses of vehicles for your mission, and being really clear about what that mission is means you can find the right vehicle.
Brendan Yes, absolutely, 100% agree.
Define your mandate for buying a business
So ultimately, this comes down to, starting with yourself and an understanding of what you’re about. If an institutional investor or private equity firm or a fund manager wants to go and raise the money and to buy businesses, they will work out the types of businesses they want to target, and they typically call that a mandate. So if we use that word mandate, and say, Well, if you’re going to go out and buy a business and invest your own money in doing that, you need to define your mandate. And so what is a mandate? Well, it’s a clear description of the kind of business that you want to buy. A good analogy, particularly for what I imagine is the size of business that most of the people listening to this are a holiday house. If you’re in a position where you’ve got funds available to invest in buying a business, you probably have the type of funds available that you might go and buy a house at the beach or a house in the mountains or a house on a property in the country. Before you start, you need to set some characteristics.
- Where do I want it to be?
- How much money do I have to spend?
- What kind of characteristics do I want the property to have?
- Do I need it to be close to certain services?
- Will it need to have a certain number of bedrooms?
- Does it need a lot of work to fix it?
- Or one that’s only just recently built?
So all of those things, then help you to filter your search to find the property you’re looking to buy. It’s not really very different to when you go to look for a business to buy. You need to think about all those characteristics that are going to suit your strengths, interests and aspirations. Including the market, the size of the business, to the positioning and style of business.
Is it people heavy or capital heavy, or people in capital-light?
All of those things go to how do you define your mandate?
That’s a very powerful analogy because we’ll also at some point, talk about the ratio of how much money you’ve got to put in against the value of what you might be willing to buy.
Consider a business partner when buying a business
Yes, it’s no different to the property purchase. You’ll have a certain amount of money yourself. And then you’ll probably go and look to a bank or some other lender to top that up to increase the amount of leverage and effectively increase your capacity. Probably not a topic for today, because there’s a lot to cover in there, but definitely something we can cover in a later episode. Yeah, and probably at the time when we’re talking about valuations and deal structures. Yes, we come into play. Okay, but what one of the other things that kind of comes to mind when it comes to, you know, what is your budget for a business you’re looking to buy is also whether or not you should consider a business partner. And, you know, if you’ve got a certain amount of money and you think you might need a bit more, one way to increase that capacity is to find someone to go into business with you. Now, it might feel as though I’m adding some more money to the pot by inviting someone else into the mix is useful for the money alone. But actually, it’s more about the comparative strengths that those people can bring. So I would actually also encourage people when they think about their own strengths and interests, to think about where the gaps might be, and think about whether or not there are people in their network or people that they can find that might be able to fill those gaps. Because having a business partner, particularly if you’re going into your first investment is hugely valuable. Someone who, side by side can be taking the risk on with you. And effectively they are sharing the burden of, not only the hard work but also the risk. Do consider a business partner and try to find someone that can be a good fit for you in terms of comparative strength.
That’s something that Geoff and I have talked about and have a blog on. What tends to happen is, from what we’ve seen is that it’s the danger is that at the outset unless you define an ease back to this knowing what you want, unless you both or however many of you that are extremely clear about that, there’s a tendency over time for them to drift apart, and that’s where friction can get involved. I think that’s something else that we need to talk about, in a future episode. How you would actually go about working those things out to make sure that the people that you pick, that you’re all actually on the same wavelength and you’re all actually wanting the same thing.
Absolutely. I mean, alignment of the mission is what I still believe is the greatest driver of value in any business at any stage of its lifecycle. And if you can get that right, you’ll create the most value. And when it goes wrong, it can go really wrong. So I completely agree, and it’s one of those things that you not only need to assess before you start, but you need to think of a rhythm in which you can continue to reassess it. And make sure that you continue to stay aligned, through the life cycle of that investment.
Yes. And then how you deal with it when the alignment becomes wider. How do you actually deal with it and bring it back?
Yep. Yeah, absolutely. And agreeing on those things upfront is really important. Typically, if people do find business partners, particularly for this sort of thing, there’ll be people that are already in their network and potentially people that they’re quite close to, because there’s a level of trust there. And what you don’t want a mistake is, is enter into a process whereby because the trust is there you go light on articulating those details.
Because then that’s where you end up with real problems. So don’t mistake a good relationship for the lack of a need to properly articulate the business relationship as well. I think I’d clearly articulating the business relationship is critical, regardless of the existing relationship that’s there.
I suspect there’s much value in that as well. If you can’t actually spend the time and you don’t have the maturity in that relationship to figure those things out at the beginning, that is probably a very good message for what’s going to happen when things don’t go to plan later on.
So spend the time in the beginning not later on.
Yeah, if you can’t have a tricky conversation before you even start climbing the mountain, imagine when you’re halfway.
And the obvious trigger is when things go wrong. But it can be when things go better than you expect. And suddenly a business gets a lot more successful or grows very quickly. That will also expose differences in people’s missions as you call it.
Absolutely. And that’s why I think that you need incremental, regular incremental check-ins as, the best way that I’ve seen work well. Getting good practice with your partners about how to discuss it and how to share the same language in the way in which you discuss is valuable. And doing that from the outset is extremely powerful.
How do you consider what your mandate might be like the type of business and its characteristics?
And then how do you think about whether or not a partner could get involved?
And I think if you were looking to set out on your journey, definitely those things would be top of mind for me.
The search process for finding a business to buy
Yeah, I do think so. So one of the other things that you’ll get into pretty quickly after you, I guess, cross those first bridges will be the search process. And your question about knowledge is a really interesting one because I think there’s a certain amount of knowledge that you can bring to the equation. That will be informed by those initial questions you are asking around strengths and interests and aspirations. So you generally tend towards those areas in which you are most knowledgeable. And those will probably be the business areas that you end up focusing on in defining that mandate. But there is no doubt that once you start the search, you will continue learning. And I think that the search process can be hugely informative, and educational. So, you know, because the search, I think people need to be aware of the fact that the search will take time. It’ll take not only elapsed time but time and effort during that period of elapsed time. You know, to find a business might take you three to six months to then actually go through the process of acquiring that business might take you another three to six months. This is not a short process. This is like planning a holiday. There is a significant amount of time involved. I mean, the first business that we bought, we would have easily looked:
- high-level summaries for 150 to 200 firms that fitted the mandate,
- detailed information documents for at least 50 of those
- met with between 10 and 20 of the owners,
- formal offer on five,
- we bought one.
Yeah, so this is not a process where you, flick around on the internet for a couple of days and identify 10 businesses go and meet with a couple and buy one.
I guess some people do it that way. But I think what we’re saying is that’s not the best way of doing it.
Well, I’d say you if you end up buying a business on that shortened process, you’ll either end up being very lucky or very unlucky.
And you won’t know which for a little time to come.
How much knowledge does someone need to begin buying a business?
I think it’s worthwhile knowing that that the search process before you even get to the negotiation process, and definitely before you get to, taking ownership is a journey in itself.
To your question around knowledge, the benefit of the journey is the knowledge that you gain along the way. So don’t discount the search as just a means to an end. The search itself is hugely informative. The searches that we’ve done for the businesses that we’ve bought taught us much about the marketplace. So much about the competitors, the supply chain and the customers. That it allows you better than you’ve otherwise would be to hit the ground. I was going to say running but maybe kind of a skip to a jog. Because my next point will be the day after you buy the business, you learn a lot more than that. Don’t discount the search process, specifically when it comes to knowledge. Because I think there’s a lot to learn during that search.
Okay. But the point is that someone that’s interested, shouldn’t stop being interested because they perceive they have a lack of knowledge at this point.
I don’t think so. I think they need a passion and an interest to learn. You know, one of the businesses that we bought is in the mining sector. I didn’t have any mining sector experience before we bought that business. I had some associated experience. I’ve worked with services businesses before I’m an engineer by trade, so I understand technical products. I’ve worked with large organizations of which many of the miners are. So I have some transferable skills, but a lot of what I learned about the mining sector and particularly the part that this business operates in I learned both during the search and then post-acquisition and the transition phase. So I think you do need to have a certain passion and interest in in the area that you’re looking to invest. Because if it’s not a topic you want to dig into, you won’t apply the right energy to it. I would think about things like skills and particularly transferable skills, and I think about knowledge and transferable knowledge. And definitely check that there is an ability to leverage some of that that you’re already bringing to the table, but I definitely check passion and interest and then make sure that you can then use that passion to then continue to build that knowledge base.
Okay. Well, that sounds to me like an excellent place to start there, we’ve covered off probably what four key things that I’ll make sure that those appear in show notes. So anybody listening to this, if you go to the episode show notes, we’ll make sure that the key points are there. And I guess what we’ll do next Pete is the next step. And then we’ll just build on from there.
Key Points for where to begin buying a business
- Understand what aligns with you, your interests and knowledge.
- What is your motivation?
- Define your mandate to describe what business you want.
- Consider a business partner to share the risk and workload.
- See the search process ars a learning opportunity.
- Be aware of transferable skills that you can bring and where your gaps might lie.
That’d be fantastic. And I think if the next conversation we could kick off with, a little bit more of a discussion around what this search might look like. And then move into that real kind of valuation structuring negotiation phase, which I think is quite unique, particularly when it comes to businesses of this size and scale and ownership.
Yeah. Okay. Well, that’s a great start. And thank you for your time again, Pete, and we look forward to our next instalment on buying a business.
Thanks, Brendan, it’s always great to chat.
Okay. Thanks for joining us. Bye bye.
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