Episode Summary – Reasons to buy a business in 2020 rather than starting one

Introduction 

Welcome to episode 13 called Reasons to buy a business in 2020 rather than starting one. My name is Brendan Barrow, and today we have our first expert interview about the advantages of buying a business and why 2020 could be the best time.

1) We explain the benefits of buying a business over starting a business.
2) Why the Covid-19 downturn will present us with so many opportunities to acquire great companies and rebuild our economies.
3) Why the word “entrepreneur” needs to be reset to recognize business owners who are the Forgotten Entrepreneurs.

Remember, Listen Before You Leap!

 

Links and resources

Blog-Thinking of owning  a business-would you be successful?

Self Assess Your Readiness with our Business Readiness Test

Blog- Is this a bad time to start a business?

Blog -Managing a business-tips for new owners

Pete Seligman – LinkedIn Profile

Pete Seligman – Alpin

Episode 13: Reasons to buy a business in 2020 rather than starting one

In today’s episode titled ” Reasons to buy a business in 2020 rather than starting one” we welcome Peter Seligman, who is the co-founder and executive director of Alpin. He has an impressive track record as an acquisition entrepreneur, and he gets very excited about buying businesses. So welcome, Pete, and perhaps as an introduction, you tell us a little bit about yourself.

Episode Related Resource Stack

Blog-Thinking of owning  a business-would you be successful?

Self Assess Your Readiness with our Business Readiness Test

Blog- Is this a bad time to start a business?

Podcast Episode -You 360 “what do you really want?”

Pete Seligman – LinkedIn Profile

Pete Seligman – Alpin

Pete

Thanks for having me, Brendan. It’s great to be here. And it’s great to have conversations like these about the reasons to buy a business. I always enjoy exploring ideas, and particularly in times and in markets when things are a bit unstable. And so maybe some of these conversations might not only help us with our businesses but also other people who might be listening. And I’ll try and keep my background as quick as I can. I’m an engineer as I qualified as a civil, structural engineer and spent quite a few years designing and managing projects. I then moved into investment banking, spend some time in property management and operations. About seven years ago with a good friend of mine Iain Morris, we founded Alpin. The main purpose behind founding this business was for us to buy or acquire an operating business that we could run. We put ourselves to the test to see if we could own and operate a small business and with the full scope of responsibilities and accountability. And we bought SRO technology which we still own today. But what we found through that experience, is that it opened our eyes up to the opportunity to help others to be exposed to that same small business operating environment

To buy a business you need three parts:

1) a business that is in a position where the existing owners want to sell either in whole or in part 

2) an investor(s), whether that be yourself or others who are interested

3) the entrepreneur who wants to run the business that you’re looking to buy

Now for us, with the first business that we looked to acquire, we were both the investors because we put our own money into it. And we were the entrepreneur and I dropped in as the CEO. 

Our Alpin business splits into three parts. 

1) first is us being entrepreneurs.  

2) second is we love backing other entrepreneurs 

3) third is bolstering other entrepreneurs. 

And that’s our advisory practice where we sit alongside other business owners and help them to grow their business that they already own.

Brendan

Yeah, that’s great. And I think it’s encouraging to hear this; you are hands-on not just from a distance advising. 

Avoiding hidden causes of business failures when you buy a business.

We met about three years ago, and quite recently, we were talking about the Should I Own A Business podcast and what, Jeff and I describe as the noble purpose behind it. As advisors, we saw some common and consistent themes behind the scenes of businesses and why a lot of them were going wrong. We met lots of owners who were saying that if only I knew this, or if only I knew that, then I would have done things differently. And in some cases, some said, I’d never have ever done it. So we believe that if people understand what they’re going to get into, they will make a more informed and a balanced decision. And they’re going to avoid what we term is the hidden causes of failures. Things like capitalization or bad management get talked about as causes. But we saw a whole range of other things behind the scenes that people really need to prepare themselves for. In our scope, buying a business is as much entrepreneurial starting a business and buying a franchise as well

Pete

Buying a business is entrepreneurship

I completely agree with that comment. And it’s worthwhile picking up on that just there. When we first started doing what we’re doing with an aspiration to acquire a business that already had an operational track record, I didn’t work out what we called that activity. But, in the last couple of years, it’s become more and more evident to me that there is a whole suite of activity around the concept of acquisition entrepreneurship. In America, they use the term entrepreneurship through acquisition, which is a whole realm of entrepreneurship that I think gets overlooked.

Brendan

Yes, absolutely. So essentially, we’re going to talk about the concept of buying businesses and opportunities that exist. And those opportunities exist, not because of coronavirus, some might, but COVID-19 is, perhaps enabling this. It’s not the root cause of what we’re going to talk about. But we have to give you a warning at this point about what you’re going to hear. And the warning is this.

WARNING: We are not about the asset-stripping psychopathic approach, to run around the market and take advantage of distressed businesses and people.

Today our conversation is opening our minds to ideas perhaps we haven’t been exposed to, therefore we haven’t considered. We’ve got about six things to cover. One of them let’s start with is to awaken positivity, about opportunities that exist in the current economic turmoil and how they might present themselves. So what’s your thoughts on that then Pete?

Opportunities to buy a business because of the COVID-19 economic slowdown

I just put a post on LinkedIn this morning to that point. And the analogy I used was in a NASCAR race. So everyone will know the other picture, whether you’re, you’re a Days of Thunder type person or a cars movie type person, all the cars lapping around, lap after lap at high speed. And then quite often in most of those races, there’ll be a massive pile-up so there’ll be a big crash where multiple cars run into each other. There’s smoke all over the track and wheels flying everywhere. And the cars that are coming up from behind have a really important decision to make. Do they slam on the brakes or push down the accelerator? And I think that there’s an interesting lesson in that for the situation we’re in right now. The virus and then the contagion to use that word of that into the economy and society is akin to one of those big car crashes. While I think risk management is always an important thing, and I spent many years using risk management as my job title, and so I’m in support of managing risk appropriately. Now is not necessarily the time to slam on the brakes. Now might be the time to pick a line and get your foot on the accelerator. And I think that there are lots of opportunities to deploy that approach.

Brendan

Systematic dismantling of western economies will reverse now

If we think back probably over the last, say, 15 years, and here in Australia is probably no different than the other Western economy, certainly not to Europe in the UK, we’ve seen an almost systematic dismantling of certain parts of the traditional economy, and offshoring. And we’ve seen the switch towards the financial and service industries. Now, layered on top of that, we’ve now got an unprecedented shutdown of parts of the economy. 

There are questions about the dominance of China. 

We’ve seen questions like “is capitalism broken?”

And I think people are confronted by life and mortality, perhaps in a way that they haven’t before. So not only have we got economic pressure and change thrust upon us, but we’ve also got a period of social change. People are stunned at the moment. They’re overwhelmed by what’s happening and the potential impact on them. But I guess those of us that have been around for a while know that this will end. And we also know that whenever there is change, there are going to be winners as well as losers. So the opportunities are there. Whenever this change, opportunities arise, and really, it’s about, this positivity, we’re talking about today’s opening our mind to Okay, we’ve got all this happening at the moment, but let’s just think this through. Change is going to mean that we are going to change, and there’s going to be opportunities if we open our minds to them.

Well, I know the thing that we strayed into the other day. So I’d like to hear your opinion on this because you are an entrepreneur. That is the reset of the word entrepreneur because it’s been kidnapped. So what’s your thoughts about that?

Business owners are entrepreneurs

I’ve only started using that word over the last six months in a repetitive way. And, I think that it was when I was trying to reflect on a description of I do. The best definition of entrepreneur that I’ve come across, and it’s quite simple. It’s someone who takes on risk in the hope of reward, and I think that is a nicely generic phrase that opens the definition of an entrepreneur to a range of activity. That could be 

1) startup activity 

2) could be acquisition activity

3) intrapreneurship that sometimes we hear about within the ecosystem of large corporates. 

Over five or 10 years being labelled as an “entrepreneur” unfortunately became sexy. Using that label, as a badge of honor, was a little bit overused.  I’m not saying there are, people who are in that sphere that aren’t real entrepreneurs, but I think that there’d be many people after the reward that didn’t necessarily take on the risk. In my view, to be a true entrepreneur, you need both sides of that equation, you need to have taken on the risk. And effectively the hard work in the hope of that reward, not just be looking for the reward in its own. So the other little bit of work that I did last year, just for my own education was to look at a bit around the background of the word entrepreneur. It’s been around for years, like, hundreds of years, and it’s a macroeconomic term. There was much debate in kind of traditional economics around what it was that made up economic and social development. 

There’s talk about the three components of labor, capital and resources or effectively people, money and things that you need to undertake any economic or social activity. But the way entrepreneur came to light was the fact that there was an argument that said, Yeah, those three things are useful. But what you’re missing is the catalyst. And that catalyst is the entrepreneur. I like the idea of this, you know, you were phrased it then as being this reset, about thinking about entrepreneurship, or the definition of an entrepreneur, as being those people that are willing to take on risk in the hope of reward. And it’s those people that harness those three components of people, capital and resources to make real things happen to generate real economic development or solve real social and community problems. I think there’s a real opportunity for us to reignite during this overall reset.  

The word Entrepreneur needs a reset

Brendan

The definition of, someone that’s taking on financial risk in the hope of profit is simple.

There’s no mention in there about digital, no mention of venture capitalists and no mention of Silicon Valley. Jeff and I, we often talk about the ordinary people. In the introduction, I spoke about the Forgotten Entrepreneurs. It’s almost like, we’ve got this one section of the entrepreneurial spirit because you use the word sexy. It’s seen as this trendy thing to start, a digital business. Yet we know that they’re only a relatively small proportion of our economy. The Forgotten entrepreneurs are actually out there every day, and they’re just not seen or heard about, but they’re out there. Today is about revitalizing that thinking and making you think about it differently.

You don’t have to be a digital startup to be an entrepreneur.

Pete

As you alluding to earlier, the current market environment across the world is rethinking its supply chain and how it’s going to piece together those different parts of the puzzle. And in that environment, things like manufacturing and advanced manufacturing and robotics and even things fundamental to supply as fabrication will be revisited. When they get revisited, they’ll get revisited by a new generation and using a new lens, which is exciting. If we can inspire some entrepreneurial spirit in those realms as well, I think there’s a huge opportunity.

Brendan

Yes, absolutely. I think of it like sleeping talent, and we need to wake that talent up. What do you think the Forgotten Entrepreneur looks like? What is this mythical person that we’re talking about or who are they?

Buying a business is entrepreneurial :The Forgotten Entrepreneurs 

I think entrepreneurs come in all shapes and sizes, that’s what’s so exciting about it. Some of the most unassuming people in our community are the most entrepreneurial. If that’s the way you’ve operated for most of your life or career, it’s easy to forget how entrepreneurial you are.

Anyone that that owns or operates their own business is immediately an entrepreneur because there is risk in there and you own that risk holistically.

And obviously, you’re hoping for a reward because that’s the reason you’re doing it. So I think that there’s a necessity in the entrepreneurial spirit of any business owner. I think that there are also people in, in society, who are entrepreneurial in the way in which they inspire activity amongst others. You know, there are entrepreneurs and not for profits, there are entrepreneurs in local community groups. I think those people are thinking about the risk that they might need to take on in trying to commit a group of people to an activity that should be rewarding for the whole.  It’s about being flexible in the way that you do things and thinking about outcomes, but delivering in real terms daily. I think there used to be an approach where, if you were to describe being an entrepreneur, it was either owning a Ferrari or having 10 failed businesses behind you. So it was almost like you’re either a multimillionaire or repetitive failure. And either of those definitions created the definition or the imprint of entrepreneurship. Now you can be an entrepreneur and own a Ferrari. And you can also be an entrepreneur and have failures. But they in their own right, don’t define the term. I like the authenticity push that’s coming through not only the community, but the business world is a lot more behind the scenes of entrepreneurship. So I think that something missed previously was how much hard work, blood sweat and tears goes into, to most successes.

Ten years work to become an overnight success

You know, now it’s much more common for people to realize that it does take, you know, the quintessential 10 years to become an overnight success. And I think that that’s a great thing. And the reason why I think it’s great is not just because it’s lifting the veil, but I think it might help to inspire others to try, or even try again. So, for example, there might be people out there that could be entrepreneurs and could be great entrepreneurs and to the, to the scope of, of your podcast about buying a business. There might be people out there that would be great candidates to acquire a business and owned and operated. But they’re concerned because the only definition of entrepreneurial activity they’ve seen is either extreme success or extreme failure. Whereas if they can start to see that actually, there’s just good solid hard work, a bit of risk-taking in a measured way, and a commitment to following through, they might be willing to try. Then if they try and fail, but then there’s enough discussion in the general community about how even successful entrepreneurs failed on their journey. Then that same person might be willing to try again. So I think lifting the veil to what real entrepreneurship looks like, the most exciting outcome about that, for me, is the way it might inspire those latent entrepreneurs that are out there to have a go.

Brendan

The Should I Own A Business Podcast is about avoiding the hidden causes of failure

Yes. And that speaks very much to the, to the reasons behind the podcast. Geoff and I did our research, looking at, why we’ve got all this information at our fingertips? We’re walking around with essentially supercomputers in our pocket where we can, Google anything that we want and get immediate information. But how come new business failures are still astronomic. So we started to look at other reasons for it. It’s not about information. It’s about knowledge and that there’s a fundamental difference between information and knowledge. And I think one of the things going wrong in the world at the moment is we were confusing those two things. We think limitless information is the “smarts”. Well, it’s an element of it, but knowing how to use the information is what’s really smart. 

The 3 reasons buying a business could be better than starting a business.

And then, so let’s just for a second, for the audience, who might not have thought about buying a business. So talk us through what you see, the key benefits of buying a business over starting a business. They keep hearing and are constantly fed information about startup all the time. Well, let’s just rebalance that. Why would you say buying or acquiring a business has merit?

Pete

1) One reason to buy a business is self-awareness. 

Some people are startup people, and some people aren’t. And I’m not a startup person. I’m more than happy to help other people who want to start up a business think about what their business might need to look like to grow and scale. But I’m not the kind of guy that’s going to take an idea and then startup businesses from scratch on this. That said, I guess we almost did that with Alpin, which is the business that gets involved with other businesses. The self-awareness comes down to which parts you think you enjoy? And what are the elements that you think you’re good at? And how can you contribute value to a business? From my point of view, the bits that I’m good at is making things operate well, and looking at ways of scaling and growing and looking at ways of building teams and developing people. Those things have much more relative value to an existing business than they are to a non-existing business looking to start. 

2) The second reason to buy a business is Cash Flow. 

If you can identify a business that has been operating for a period that has: 

  • good trading history 
  • a customer base that has good attributes like diversification with a good solid customer base, blue-chip, if possible.
  • a good team of people that have some history with the business. 

So you’ve got some reliability in that ability to deliver. That creates a real platform, without building the scaffolding. Such a business is an existing stable platform with a “beating heart” that you use. So it gives you a bit of a run up on this opportunity to then operate a business, and you do not have to go back so much before you go forwards. So there are some real benefits in buying an existing business because you can touch and feel it a little bit Before you get involved. You’ll never learn nearly as much about a business before you own it as what you do after the purchase. And literally, that goes from the day before you bought it to the day after you bought it. So due diligence is pretty essential, and you need to get good at that. But it’s amazing what you learn when your hands are taped to the wheel. And there are always challenges in that, but that’s part of the risk, right? That’s part of the enjoyment in that entrepreneurial risk you’re taking in the hope of reward. 

So I think that buying an existing business rather than starting one up for yourself, I’d say it’s just, it probably boils down to the word momentum. There’s a little bit of momentum that you can leverage to get your hands on the wheel and take it forward. 

3) The third reason to buy a business in 2020 is the availability of great businesses

There are so many great small and midsize businesses that don’t have a good enough succession plan and will fall by the wayside if we can’t build a viable community of entrepreneurs that are willing to run and pick them up.

Brendan

With that, that leads us very nicely to probably the sixth and final point of today. And that is, why could acquisition be the fastest way to strengthen our economies?

Pete

Baby boomer business owners need to sell

Baby Boomers have been very successful founders, owners and entrepreneurs over the last, 50 years. And as a result, we’ve got numerous good quality, small and mid-sized businesses that are scattered frankly, across the globe, but definitely in our markets here in Australia and New Zealand, which don’t have good succession in place. 

There is generally a buildup of businesses without succession in place that either need help designing their succession so that they can transition or they need an acquisition. So ownership can transition to a new custodian or custodians. And I think that what’s happened this year, which is quite an interesting dynamic. Six months ago, most people would have been forecasting that their 2020 financial year was going to be one of their best on record. Whereas obviously, 2020 has become potentially one of the worst years on record for economic development. And, therefore, I think there will be many owners that will have quickly changed their minds. As you said in your intro, that’s not a reason to raid those companies and look for excessive bargains. But it is a reason why there might be more vendors as they have been through quite a few global shocks. So I think that if you’re on the buying side of the equation, and you’re interested in getting involved, I think this year, there’s going to be some good opportunities. And I think there can still be some very reasonable ways in which you can enter those transactions such that the vendor gets a good and fair deal through that process.

Brendan

Futures episodes on buying a business

Yeah, that’s great and Peter, we could do more of these episodes where, in plain English, we take people through some of the key things that they have to think about if this is something that they might be interested in.

Going back to the people side, it suggests to me that there’s probably in the economy at the moment a whole group of people with, management experience or leadership experience in other business. Who might not have thought about owning their own business, but they might have a skill set that would predispose them to be very successful. 

Pete

And I think that you if you look deep and hard at what your transferable skill set is:

  • dealing with people, 
  • numbers, 
  • understanding processes
  • picking apart markets, 
  • negotiation, 

these are all transferable skills that you might be applying in a particular realm right now, that might be a perfect attribute for acquiring a business. And if you get the right team around during the right partners in place, anything’s possible.

Brendan

Great. Well, I think we’ll probably leave it there for today. So, thank you, Pete, for your insight and expertise. I’m sure that that will be a very well-received episode. And we look forward to talking to you next time.

Buying a business podcast episodes

E16 Buying a business-where to begin?

E20 Buying a business-how to find and choose the right one

E25 Buying a business-valuation and choosing the best deal structure

Disclaimer

The information contained in this podcast is general and does not take into account your situation. The content does not constitute legal or financial advice and should not be used as such. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser or lawyer in your jurisdiction. To find out more, please go to www.ShouldIOwnABusiness.com.