Dealmaking can be scary. That’s why we invite you to visit this webpage every Wednesday for upbeat tips submitted by buyers and sellers, and their advisors, of small and midsize businesses. It’s another way to publicize your capability if you have an encouraging story. We’ll attribute you as the source unless you want to remain anonymous.
Click to email your contribution and/or comment for possible publication, with attribution, on this webpage.
Creative financing to build a business pyramid.
Here one of Ted Leverette’s biggest success stories. “It’s been over 20 years and my client is doing better than ever. The client hired me when he had no money for investment, no borrowing power and no business experience. He was a former pro football player. In a very short time I showed him how to start a full service fitness, racquetball and swim club, which he has expanded into a lucrative chain in nearby cities, none of which had a competing club. My creative financing and business pyramid model put him in business, making a profit, several months after hiring me to help him prepare his business plan and the proposal he submitted to sources of financing. One of the keys turning his dream into reality was selling $10,000 lifetime memberships . . . before building the first facility. (And the next one.) He sold enough memberships to raise the capital he needed to qualify for bank financing. His startups opened successfully on day one. His case became the centerstone of a college course I taught for many years (which was the most popular business course ever for the college): The Entrepreneur Series.” [Several of the other creative financing techniques this client used are among the 500 explained in How to Get ALL the Money You Want For Your Business Without Stealing It.]
When disability doesn’t mean disabled.
My friend and I would take our Labradors to a waterfront park. We’d bring our Frisbees so the dogs could have fun chasing each other, fetching and swimming in the lake. There was a pack of neighborhood dogs at this park. They’d be having fun together. One of the regulars was a little Sheltie mix with only three legs.
Yet she kept up with all the four legged dogs. Probably because nobody said, “You can’t run as fast with only three legs.”
Some businesses are like that three legged Sheltie. They, too, have detriments. And some companies have learned to overcome those blemishes and be profitable. And sometimes the detriments remain and the businesses remain profitable.
Think about at the “worst” features you discover during due diligence. Sure, you’ll find some red flags, but if your skills can neutralize those red flags, ask yourself: Can I use those detriments to further motivate the owner to sell on terms more favorable to me? Savvy buyers do this when they know they can, post-closing, manage those risks.
Got control. Didn’t have to buy the business!
A while back, Ted Leverette’s client met the owner of a business doing $3,500,000 a year in sales. The company was started in 1910. It was being run by the grandson of the deceased founder. The grandson started putting lots of the business’ profits up his nose. The business could afford his drug habit, but it could not afford his lack of attention to business while he was high. Profits were declining. Employees were jumping ship because they saw their future was at risk. My client saved the day. He had two things the owner desperately needed: 1) He wasn’t a drug addict, and 2) He knew how to manage and grow a business. My client got 51% control of this business without purchasing even 1% of the stock. He owned 51% of the stock if he stopped the company from losing ground. Not grow, but simply stop the slide. And of course, Leverette’s client negotiated an option to purchase the entire company if and when he wanted to do so. Which he later did when the firm’s modest profits returned to extraordinary profitability. Why would the seller agree to this? Because he was faced with losing it all. Why could my client get this opportunity? BECAUSE HE KNEW HOW. I don’t want to be guilty of what I criticize the get-rich-quick promoters of doing. It is not easy to find one of these deals. In fact, without a very specific SEARCH SYSTEM it’s nearly impossible to find one. And when you find one, you must KNOW exactly what to do, in the correct sequence. You must act very quickly, or somebody else gets the deal.
How to beat people competing with you to buy a business.
“Two guys are walking through the jungle when a lion appears on the path ahead of them. One of the two starts putting on a pair of running shoes. ‘Why bother with running shoes? There’s no way you can outrun a lion,’ says the first. ‘Who said anything about outrunning a lion?’ says the second. ‘I just want to outrun you.’”
Source: Ichak Adizes, on the importance of knowing what it takes to win in a competitive environment.
See numerous ways to beat buyer competition: How to Buy the Right Business the Right Way—Dos, Don’ts & Profit Strategies a new book by Ted J. Leverette, The Original Business Buyer Advocate ®.
Rejoice! It’s not gonna happen.
Surprising but true: A large proportion of people searching for any kind of business end up buying a company that differs significantly from their quest. And they’re delighted with their acquisition. So when you can’t find what you seek, hallelujah! Your pathway excitingly widens!
“I didn’t know I couldn’t enjoy myself.”
Did you see the “Peanuts” cartoon strip that showed Charlie Brown playing with half a yo-yo? It was broken. But he was having a good time dangling it, bouncing it up and down, and playing fetch with his dog, Snoopy. Suddenly Charlie Brown’s girlfriend Lucy comes along: “You stupid dummy,” she says, “You can’t have a good time with half a yo-yo. Everybody knows that!” Poor, dejected Charlie Brown throws his toy to the ground. “I’m sorry,” he says, “I didn’t know I couldn’t enjoy myself with a broken yo-yo.”
This story has a moral for people who want to have money, and for people who think it’s wrong to want to have money. Depressing types, like the Lucys of the world, have convinced many people that having money is bad. They want us to feel guilty for having it or wanting it. They want to stand in our way of getting it, of discovering it is FUN TO EARN IT AND IT IS FUN TO HAVE IT. The only thing bad is not having enough of it, when you need it, like when you retire, or send the kids to college, or pay medical bills or simply to enjoy life.
For most people, buying a business may be the only practical way to safely and predictably increase net worth to the figure that is necessary to support themselves during retirement in a lifestyle that is comparable to what they enjoyed during their working years.
Source: How to Buy the Right Business the Right Way—Dos, Don’ts & Profit Strategies, by Ted J. Leverette, The Original Business Buyer Advocate ®
How businesses can beat their competition.
Here’s a little idea with the potential for big opportunity. It’s a story that the founder of our company tells. His name is Ted Leverette. It’s an example of what we can do for you or what you can do for yourself. But, read to the end of this story for what went wrong and how you can avoid such a mishap.
You might recall that the proliferation, in the 1980s and early 90s, of print shop franchises created more print shops than the marketplace could profitably support. Competing franchise systems were selling so many franchises that print shops were on the corners of intersections where there used to be gas stations. It didn’t take long for everyone to realize that there were more print shops than the marketplace could support. Ted’s idea: If you cannot beat ‘em, join ‘em. He asked print shop owners if they were worried about industry saturation. Most were. Some of them hired him to help them do something about it. It was easy to do what we did – because these owners were in the same boat – and their boat was sinking. We used the technique the big boys use, industry consolidation via M&A, but for small and midsize print shops. Within a month or two Leverette guided the owners of two suffering print shops so they could merge their companies. The idea was to operate from one location, so the surviving company could be more efficient and profitable. Before the consolidation these print shops were only running one shift. So we shut down the shop with the least desirable location. The employees from the closed shop went to work for the surviving shop. They worked the second shift. Later, when we did another merger or acquisition, the employees of the closed shop worked the third shift at the surviving shop. (There was no second or third shift before the consolidation.) Closing two print shops enabled us to sell most of their equipment. The proceeds from the sale of equipment and vehicles and the elimination of redundant overhead created a windfall profit for the surviving print shop. And each time two printers merged we cut out one competitor. You can use this technique to grow your business, even if your industry is not saturated with competitors.
But, think twice before trying to grow by consolidating businesses within a (soon-to-be) dying industry. The accomplishments we achieved in the printing industry were significantly destroyed when desktop computers, printers and software made it easy and cheap (for former customers of print shops) to design and publish beautiful documents. (And with 3D printing, which is coming on strong right now, it won’t be long before other kinds of companies lose market share.)
Think about this: Five hunters go into the woods, observed by a crow. If four come out, the crow remains wary, aware that a fifth remains. Smart crow. But if six hunters go in, and five come out, the crow thinks the woods are safe. You see, crows can count, but only to five. Moral to the story? Be wary, for you never know what you don’t know.
Did you hear the one about the fox and the rabbit?
Once upon a time, a fox and a rabbit were having a “cool one” in the local pub. Talk turned to their common enemy, the hounds of the hunters. The fox rather boastfully stated he held no fear of them because he had so many means of escape. If the hounds should come, he could bolt up into the attic and hide until danger was safely past, or quick as a flash he could run out the door and no hound alive could catch him. He could head for the nearest stream and run in it for a spell until the hounds completely lost his scent. He could even go in circles, backtrack a few times and so completely confuse the hounds that he could then climb a tree and watch them in their quandary as they sought to find where he was. Yes, his methods were many and his confidence was high. On the other hand, the rabbit rather timidly and with some embarrassment confessed that if the hounds should come he knew only one thing to do, and that was to run like a “scared rabbit.” Well, moments later they heard the baying of the hounds. The rabbit, true to his word, hopped up and ran out the door like a scared rabbit. The fox hesitated — as he debated whether to bolt up into the attic, dart out the door and depend on his speed, head for the stream, or take off and confuse the hounds by backtracking. While thinking, the hounds rushed in and tore the fox to shreds. Do you know the lesson in that story?
As the late Lionel Haines, a writer and entrepreneur said, “You must act like a hunter, not a trapper.” You can’t wait for opportunity to come around. You must seek it out, and when you find it, you must KNOW what to do, or lose your chance.
Acquisition Creative Financing—After Gaining Control
This is a creative financing deal we did during in the 1990s (the figures are 1990s dollars, unadjusted for inflation).
The company is a very old moving and storage business that generates $150,000 annual profit.
The buyer did not have enough cash to meet the seller’s demand for the down payment.
While analyzing the company’s financial statements, the expense category, Maintenance of Vehicles, caught our attention.
The company owned 8 trucks. The average age of the fleet was 9 years old. Most of the trucks had been fully depreciated, so there was no write-off against income.
Two mechanics worked full-time maintaining and repairing the trucks. Their payroll, benefits and employment taxes amounted to $80,000 per year.
Nearly 3,000 square feet of the company’s warehouse was devoted to the repair shop. The rent on this space was about $15,000 per year.
$10,000 in spare parts was on hand, because when a truck breaks down there is no time to try to find parts; customers demand on-time delivery.
Unfortunately, sometimes the trucks were not fixed in time and the company suffered late-delivery penalties. These costs ran about $5,000 per year.
Here’s how we structured the deal:
- First, we saw the wasted cash flow
- $80,000 for wages, $15,000 for rent
- $10,000 in spare parts, and nearly
- $10,000 per year for parts and subcontracted labor
This amounted to $115,000.
- Sold all the trucks and used the proceeds for a delayed down payment
- Laid off the mechanics
- Returned the spare parts to the supplier and got a refund
- Avoided $5,000 a year in late delivery penalties
- Freed up 3000 square feet of wasted space to create revenue-producing space. This enabled us to earn $10,000 each year from customers’ to store their goods. After all, we were in the moving & storage business
We increased cash flow $125,000 per year! That is about $11,000 per month!
We then leased brand new trucks, which came with a maintenance contract, for $8,000 per month.
Subtract $8,000 for the lease payment on the trucks from the $11,000 cash flow that we created—
and we were ahead $3,000 every month.
$36,000 every year! $250,000 in 7 years!
The buyer of this business was very happy! He got more profit than he expected. The business could afford to make larger installment payments to the seller to pay off the business sooner.
This was a win-win deal. People who KNOW how do these deals every day!
Source: How to Buy the Right Business the Right Way—Dos, Don’ts & Profit Strategies a new book by Ted J. Leverette, The Original Business Buyer Advocate ®.
Click to email your contribution and/or comment for possible publication, with attribution, on this webpage.
Ted J. Leverette
The Original Business Buyer Advocate ® Since the 1970s
“Partner” On-Call Network, LLC