6 Biggest Mistakes Entrepreneurs Make When Buying Businesses with Elliott Holland: An EOFire Classic from 2021

0:01Light that spark fire nation JLD here and welcome to entrepreneurs on fire brought to you by the HubSpot podcast network, the audio destination for business professionals with great shows like Marketing Made Simple. Today, we're pulling a classic episode from the archives and we'll be breaking down the six biggest mistakes entrepreneurs make when buying businesses. To drop these value bombs, I brought to Elliot Holland and the EgoFire Studios. Elliot is a business buying expert. He has a Harvard MBA and almost 15 years experience in acquisitions. His consulting company prevents clients from losing millions buying bad businesses.

0:34In today's foundation, we'll talk about how to be careful falling in love with sellers too quickly. Never miss an opportunity to build rapport. That's critical to getting deals done. And the best time to bring advisors in is three to six months after you start your search or about a month before you get serious about a particular deal and so much more. And a big thank you for sponsoring today's episode goes to Elliot and our sponsors. Success Story hosted by Scott D. Clary is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Success Story features Q &A sessions with successful business leaders, keynote presentations, and conversations on sales, marketing, business, startups, and entrepreneurship.

1:10A recent episode discussing the billion-dollar health secret with the founder and CEO of Whoop is a must-listen. Listen to Success Story wherever you get your podcasts. Is this your year to grow a successful business? Attend the world's highest-rated business growth workshop taught personally by Clay Clark and now featuring Rich Dad, Poor Dad author Robert Kiyosaki and Eric Trump at thrivetimeshow.com slash EO fire. Again, request life-changing tickets today at thrivetimeshow.com slash EO fire. Elliot, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with.

1:56Hey, Fire Nation, glad to be here. A lot of people talk about trusting the process. I hear it everywhere and it makes me cringe. I think the reality is you have to trust your process or your journey. Most of the most successful people I know or who have walked the face of the planet had a very circular, weird, different, distorted path. And so you can't trust the process. The process was created by somebody else. Trust your process or your journey. Trust your process, Fire Nation, because what else are you going to do? I mean, this is where you are in your life right now. You're listening to Entrepreneurs on Fire.

2:35You're listening to Elliot. You're listening to me. You're about to hear the six biggest mistakes that entrepreneurs make when buying businesses. Trust the fact that you're at the right place on your journey. And I want to talk about falling in love too quickly. I kind of teased this in the introduction a little bit, Elliot. Sure. Let's be honest. I mean, in the world of bachelor and bachelorette, you know, where people are getting married after literally just a few handful of hours alone together. Is it possible to fall in love too quickly when you're buying a business? 100%. In fact, 80 % of my clients and probably a larger segment of the business buying population overall fall in love, particularly on their first couple of deals.

3:16I mean, it really is similar to dating. In middle school or high school, whenever you get started, the first couple of interactions are just beautiful rainbows, flowers, everything is great. As you become more mature in your process, you start picking out things that are sort of mission critical for you and you become more discerning. The same thing occurs with companies. I think particularly when people are trying to move from six figure salaries, which a lot of my clients do to seven figure earning potential, it's very easy to see the 10x and fall in love with the deal that you think will get you there without doing the work of diligence.

3:53So Fire Nation, falling in love too quickly. Just be careful. Just because it happens on The Bachelor and Bachelorette, guess what? Most of them break up after just a couple months of being engaged. It's the truth. I follow that stuff. Now, Elliot, maybe a quick example. What's a quick, concise, clean example of one of your past clients falling in love with a business too quickly? No names need to be said if you want to keep them out. No company names, just a quick story. One of the big things that happens in business acquisition is people, sometimes sellers under report earnings. And so in this particular case, one of my clients came across a deal close to his home and the industry he understood and he liked the seller.

4:39And so when we started, it was just everything positive. Everything was great. When we started peeling it back, the seller had reported no earnings for the past four or five years in taxes and had a bunch of sort of other things that they had spent their money on. So remodeling of their house, boats, cars. There was a Maserati on the income statement. And all these things were supposed to be added back to get to the true profit. and the buyer was just unable to separate himself from the fact that even though a lot of these things might be reasonable, the lenders and other people who are going to be involved in that process just weren't going to be able to handle it.

5:21And as he spoke to more lenders, they kept dinging his deal and he just would not let it go. I had to, at a certain point, kind of just grab him and say, hey, is this really what you want to bet your five years later on? And we had a good conversation and moved along, but that was a three-week process, John. That person should have been looking at other deals. And that's time, Fire Nation. That's time that you could be looking at other deals, sniffing out other opportunities. I mean, I get that there was a friendship involved in this example, but listen, you can't let emotions get involved when it's your future.

5:52It's not your friend's future. It's your future, the next five years. I love how Elliot put that. And a lot of people, they believe, Elliot, that when they're looking at a business, that they're an inspector or an auditor when they're analyzing the sale, but you actually have a phrase that is, leave your clipboard at home. What do you mean by this? Yeah, so I'll tell a story about me when I first started looking at deals. This was 2009. I was a consultant just talking to my first sort of private equity professionals. And when you're academic in your analysis, you wanna go in with your 75 item list on a clipboard.

6:31And when you go talk to a seller of a business, you want to start at point one and go to point two and point three so that when you're done, you feel comfortable. And one of my mentors even let me go into a meeting with my, you know, air quotes clipboard and go through my list. And after I was finished, he asked, so did you get your questions answered? I said, yeah. He said, did you notice how the seller checked out five minutes into your questioning and you lost him? and I had to sit there and realize that by asking all these questions in order in an academic way, I had missed my opportunity to build rapport with the seller and that's mission critical to get comfortable and get deals done.

7:12See Fire Nation, these are the type of things that you really need to make sure that you are doing correctly if you're going to again ensure that you're spending the next five, ten, maybe the rest of your lifetime with this business. I mean this is so critical to get this right the first time. And you also have a saying that I love, which is believe more in adjustments than cashflow, which I think is really interesting because I think so many people focus so much on the cashflow. They're like, look how much money this business is bringing in, yada, yada, yada. Explain to our listeners what you mean by this.

7:49And then let's tell a story about how this is applicable. In a general business acquisition, call it 70 to 80 percent of the cash flow that you're paying a multiple of to buy the business should be reported on the financials and maybe 20 or 30 percent can be adjustments personal items to sellers running through the income statement that's about normal but in 40 percent of the deals that i'm looking at instead of that being 70 reported 30 adjustments it's 70 adjustments 30 I've reported. And what I call that is more icing than cake because to buy that business, you're betting more on adjustments that were not present to create sort of the business you're viewing that are going to be changes that you think you can actually operate the business differently.

8:39And that's just not going to work in most cases. I'll give you an example. I was helping a client buy a online business that essentially sold content writing services to a myriad of businesses. And to sell the business, the sellers had reported, call it about$100 ,000 of profit. But when they put all the adjustments in, all of a sudden the adjusted profit was near a half million dollars. Well, to believe that 80 % of the profit is adjustments, it's like one of those cakes that has too much frosting. You get a headache after. It's just, it's not a great place to be. Let's be honest, Fire Nation.

9:19there can be a situation when there's frankly too much frosting. And I kind of want to move into cash flow. Like why do you think Elliot's cash flow is something that people really believe in and hone in on more so than adjustments? Why is that? So I won't get into a valuation class. I'll tell you business valuation is a multiple on cash flow. And so the reason people believe in cash flow is because the reason you buy a business is to earn the cash flow that it generates. So if you want to buy a million dollar business for say four times, so a four million dollar purchase, the reason you'll pay four million dollars is because you expect to get a million dollars in cash flow each year in perpetuity.

10:04And so it's worth it to pay four times that to get it for 10, for 20 years. For those who are financially inclined and for anyone who's not, you have to recognize that profit does not equal cash dollar for dollar. And so real investors are very keen on how much cash flow, how much in the bank money each business creates because they're willing to pay a multiple of that and not a dollar more. Fire Nation, we're going to talk about when. When is the right time to bring in advisors? We're going to talk about the documents themselves and also your team. All of this is coming up when we get back from thanking our sponsors.

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12:35Become the next success story. schedule a free consultation and request tickets to join Eric Trump and Robert Kiyosaki at Clay Clark's next business conference today at thrivetimeshow.com slash EO fire. I have a question for you, Fire Nation. Do you feel like your life is optimized or do you feel like you're leaving a lot on the table when it comes to health, wealth, and relationships? After interviewing over 4 ,500 successful entrepreneurs, I have found that every one of them have optimized their life to a high level. In over 12 years of running a multi seven figure a year business myself, while staying healthy and raising a wonderful family, I figured out how to optimize my life to an amazing level.

13:15It didn't happen automatically. There was a lot of struggles, but through mentorship from others and a lot of intentional work, I got there. And if you think you could use some personal guidance in optimizing your life, let me help. I've created a program called Optimize, where I will personally work with you one-on-one to get to know you, your life, your goals, and your dreams. Then over a three-month timeframe, we will create a fully optimized life that will set you up for a lifetime of optimized health, wealth, and relationships based off your goals and your dreams. An optimized life does not happen automatically.

13:49It only happens through intentional work and guidance from someone who has reached that level that you are striving for. My goal is to turn you into a fully optimized human based off of your life goals. If you want to learn more about this program, visit eofire.com slash optimize. We'll jump on a call. We'll discuss the specifics of the program. And if we both feel to fit, we'll talk about next steps. eofire.com slash optimize. So Elliot, before the break, we mentioned that we're going to talk about the right time to bring in advisors. There's obviously a wrong time, which is after the sale, but when exactly is the right time and why?

14:29So one of my favorite phrases is don't wait until 11.59. And by that, I mean the last absolute minute. And so I deal primarily with self-funded business acquirers. So people who are paying for diligence and buying companies for themselves. For those individuals, the best time to bring in advisors is probably three to six months after you start in your search or about a month before you get serious with any particular deal. And here's why. The best advisors are busy doing great work for clients. And if you don't alert them that you need their help, by the time that you actually do need their help tomorrow, they won't have the ability to put you onto their program and or schedule.

15:13Additionally, if you get to your advisors and select them, call it 30 days before you get serious on a deal, what ends up happening is you can get advice from those people to how the best processes and the best acquisitions they've seen have occurred. And you can take lesses from those things as you go in to make offers on businesses, first analyze businesses. And so you get the double benefit of making sure that the advisors have time to work with you. but also you get free game from them because you selected them early. So that's the best time, John. Now, of course, we're gonna talk at the end of the episode about how Fire Nation can connect with you if they have more questions or maybe if they want to inquire more about your services but obviously you can't work with every single person on this planet.

15:58So like where do you just even recommend people starts when they wanna start looking for an advisor? Like where does even one go? The first thing you should do is go to your network. If you have other people in your network that have bought businesses, you should ask them who they've used and if they'd recommend them. The second thing I would say, there are so many online forums for business acquisition. You can search financial due diligence in Google. You can go to LinkedIn and search for people. There are even other sites like searchfunder.com that you can go to to find people. And a lot of those places have ratings or you can find out people who have used those services before and ask them how those services were.

16:37And so in this very exciting, growing marketplace of small business acquisition, there are many places to find your advisor. What I want to move into next are documents, because of course, there's a lot of paperwork. There's a lot of documents when it comes to buying a business. So let's just break it down. Should we be relying on the documents that were given by the other party? Or should these primary documents be coming straight from the source and kind of dig into this and maybe give us an example or two of how a deal has gone wrong because they didn't go this way? In the diligence game and acquisition game, trust, but absolutely verified.

17:17And so, John, when you're dealing with paying four times cash flow for a business, when a seller is able to misrepresent profit in their favor, you don't pay them dollar for dollar, you pay them four times that dollar. And so a seller probably has the highest impetus motivation to tell a story of any time in their life. And so you have to be laser focused on making sure you're getting good data. Let me give you an example of when data is presented that wasn't accurate. So I was looking at buying a company in Texas. I went to fly out to meet with the seller before they accepted my offer, which is normal.

17:57And as soon as I get to the office, all of a sudden the financial system they were using was on the fritz. just so happened it was the day I was there. So instead of getting financials out of QuickBooks, which was their financial system, they had a series of spreadsheets, spreadsheets on spreadsheets on spreadsheets, and they all had numbers and pluses and minuses, and they all look really neat. But the problem was, since they didn't come directly out of the financial system, there was no way to believe them. And what ended up happening is that the seller was playing a huge game around financials that weren't accurate and trying to push it off to any buyer who would take it if they accepted the spreadsheet representations that did not come from financial systems.

18:42Let me tell you another story. I was in Chicago looking at a manufacturing company, and they were well represented by a business broker. So the business broker had this immaculate memorandum on the deal that just had every single thing you want to know about the business, the date it started, why it was started, the business plan. But in the end, they had copies of the financials on the broker company's letterhead. And they look really neat, John. But when I compared those to the actual financials, they were off by over 40%. So had I believed those, I may have overpaid by two times. And so you must go back to the primary documents when you're looking at buying a company.

19:27Primary, primary, primary Fire Nation, go to the source. Now, I want to talk about team. We need to have a team if we're going to be a success. And that's something we've talked about a lot on this. But what I want Fire Nation to get from you is if they're buying a business, at what point in this process should the team be up and ready to rock if they want to have success from day one? Absolutely. And the way to think about this is the jobs that have to get done to successfully buy a million dollar business and make a return. The jobs that must be done, you must check the financials. So you need a financial diligence person on your team set up at least 30 days before you get serious with the deal.

20:14You must write a purchase agreement and associated legal documents. So you must have a transaction lawyer set up at least 30 days before you get serious on a deal. You must know the industry. And so you need to know someone who understands the industry or you need to be researching that yourself. And you must know the business operations to be able to run the company day one after you acquire it. And so you or someone that you are going to bring on as an advisor needs to understand the operations, the real nuts and bolts of how these companies run. Those people need to be either yourself, if you're an expert, or set up 30 days before because you would not want to bet a million dollars on financials you don't understand.

21:00You would not want to bet a million dollars on legal documents you didn't understand. You need to get those folks set up beforehand. Fire Nation, you've gotten a master class on what it takes to buy a business the right way. But of course, there's so much more and there's only so much we can cover in a show like this. So what I want you to do now, Elliot, is number one, give us the one thing that we've talked about today that you really want to make sure Fire Nation walks away with knowledge wise that you know is super important as a takeaway. Then give us the best ways that we can connect with you and your business if we want to learn more, if we want to just have a conversation and then we'll say goodbye.

21:40The one thing I'd like to leave everyone with is the opportunities to buy a seven figure business have never been better or easier for everyday buyers. So I encourage you to consider it, but absolutely be a good steward of your money and get diligence and legal right. In terms of how to meet me or connect with me, you can go to GuardianDueDiligence.com. That's my website where you can find all of my contact information. I'm also very active on LinkedIn. You can find me there. Elliot Holland, two L's and two T's. I also have a special offer for Fire Nation where you can get a valuation review and letter of intent review that we normally charge$2 ,000 for for free if you just go to guardiandudiligence.com slash fire.

22:31Wow, Fire Nation. I mean, if you are even considering a letter of intent in your future, I mean, how are you not going to take advantage of this offer? Fantastic. Huge value. Thank you for that, Elliot. And Fire Nation, you know that you're the average of the five people you spend the most time with. You've been hanging out with EH and JLD today. So keep up the heat and head over to eofire.com. Type Elliot, two L's, two T's in the search bar and his show notes page will pop right up. And one more time, guardianduediligence.com slash fire for that incredibly generous offer, as well as learning more about Elliot and his company and check him out on LinkedIn.

23:10Elliot, thank you for sharing your truth, your knowledge, your value with Fire Nation today. For that, we salute you and we'll catch you on the flip side. Thank you so much for having me. I enjoyed it. Take care. Success Story, hosted by Scott D. Clary, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Success Story features Q &A sessions with successful business leaders, keynote presentations, and conversations on sales, marketing, business, startups, and entrepreneurship. A recent episode discussing the billion-dollar health secret with the founder and CEO of Whoop is a must-listen.

23:45Listen to Success Story wherever you get your podcasts. Is this your year to grow a successful business? Attend the world's highest-rated business growth workshop taught personally by Clay Clark and now featuring Rich Dad Poor Dad author Robert Kiyosaki and Eric Trump at thrivetimeshow.com slash EOfire. Again, request life-changing tickets today at thrivetimeshow.com slash EOfire.