47: Exactly How Robert Buys Cash Flowing Businesses

0:00Hey everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode we talk about rich habits as they relate to business, finance, and mindset, but we try and bring you two unique perspectives.

0:38One from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, what are we going to be talking about in today's episode? In today's episode of the Rich Habits Podcast, we're going to be talking about how I go about acquiring cash flow businesses. So many of you have been reaching out, hearing about some of the various investments I'm making, some that I'm making with Austin, and just what does that process look like and where do you start? So as you know, I just acquired a cash flowing business the other week.

1:09So I'm going to share kind of the intricacies and the process so all of you can do this for yourselves. In October, I found a really nice little pizza shop in a small town in Florida. We've been researching small businesses to acquire and it just went up for sale. We thought the food was great, but there was a lot of value and upside potential in this particular business just because the owners did a really good job with the food and keeping the place clean. But they didn't really have processes in place. They didn't really know how to market the business and they didn't know what they were doing.

1:41And I thought it was a great, great business to acquire. So we just closed on December 27th and we're having a blast getting started, making all the necessary changes with processes and the renovations and the new branding, new menus, all of the stuff that I really love being in the weeds on when acquiring a business. because that value add in the beginning, let's call it that first 30 to 45 days, is so huge when you're in a small town like that, especially because you can really open the eyeballs of everyone around to this new ownership and just really the excitement that goes around with the business changing hands.

2:20So we're very excited about moving forward. So this episode, we're gonna have a little bit of a Q &A style. We're still gonna hit our three points, but I want this to be very much a, I mean, listen, I'm Austin Hankwitz. I've never bought a business before. I've ran businesses, right? I started my own. I'm an entrepreneur, but I've never gone out and bought a business. Robert has done that dozens of times. So this is me and hopefully the listeners as well, learning from Robert in real time as to what goes on behind the scenes and how to do this. So the first question or sort of point here I have for you, Robert, is how does someone listening right now know they're ready to buy a business, right?

2:55How did you know that this was something you wanted to do in 2024? So I've been doing business acquisitions for, let's call it 35 years, 30 years. And for me, it was always about understanding that I wasn't really suited to work a job for someone else. And so for me, it's always been that entrepreneur mindset of going out on my own. And I just feel that I have a great eye of how to value add a business because Because so many businesses out there, they can be profitable and successful despite the founders or despite the owners of that time period, their level of understanding of how to operate the business.

3:34And so right now we're entering into this era where I think the next three to five years are going to be one of the greatest opportunities of our lifetimes to be able to acquire small cash flowing businesses because so many baby boomers by the millions are retiring and most of them simply do not have a succession plan in place. And what that means is they always thought they were going to pass along that business to a child or one of the workers or something else. And they just never really planned for the day they were too tired to come in and wanted to retire. So that is going to happen in record numbers over the next.

4:13It's happening right now, but over the next three to five years with so many boomers retiring. And it's just going to open the door for so many people to buy existing businesses that are already cash flowing and profitable without starting from scratch. And so how do you know if you're right to buy that first small business of your own? That's a tricky question. But the way I look at it is, what are you good at? Are you good at processes and numbers? Are you good at marketing? Are you good at understanding and fixing problems? If any of these skill sets are something you're very good at, then you probably make a great candidate for owning your own small business or multiples of small businesses, because you're going to understand how to create that value add, that value proposition when purchasing a business.

4:58So that's one of them. Number two is understanding yourself and understanding your tenacity and your ability to overcome strife. And knowing that and understanding that when buying a small business, don't listen to the fake gurus that tell you it's passive. You never even have to see the small business. You can own it and make all this money and it's all rainbows and unicorns without ever stepping foot in the place. That's just all bull. So please don't listen to that. You really want to understand the business, understand the market that you're in. Like with the pizza store we just acquired, We went and really dug deep into what's happening in the market because it's a small town.

5:36Where is all the growth coming from and why? What are the other opportunities? What are the competitors to the pizza store in the area? How far out concentrically are they from this particular pizza store? So all of that comes into question. So there's hundreds of micro decisions you need to understand just before you start researching on if buying and acquiring an existing business is right for you. And I think what's also really important to your point, Robert, is before people make that purchase, think of this as just as important of purchasing maybe a house or a big investment, right? You need to make sure you have your ducks in a row.

6:13No high interest credit card debt. Don't want to be in high interest debt at all. You want to make sure you have that savings account, right? You want to make sure you're doing the normal things that we preach every single episode. because once you have that base laid and you're ready to start building upon it with a cash flowing business or with real estate or with investing, you still have that base laid. So you're good. And Robert, obviously you're a deck of millionaires. So you have the base laid and has been laid now for quite some time. So let's jump into number two now, right? How did you find contact and eventually negotiate the deal to purchase this pizza shop?

6:43So that's a great question and it's different for everyone. I'm very well connected and everyone knows that I acquire businesses and create businesses almost monthly. So for me, the deal flow is there. I have brokers that reach out to me. Random people will say, Hey, there's this awesome business down the street from me that I've been going to for a long time. It just came up for sale. Can I share it with you? But for the average Joe out there or the average Jill out there, it's really quite simple. Get yourself involved, spend a little bit of time every day. If you're really ready and you want to acquire that first small business and get those at bats in.

7:19And what I mean by that is you're just practicing. You go to biz, buy, sell, you go to loopnet.com and you start looking in your area, figure out a criteria of something you want to look at. So you can really dive in on that because if you're just starting out, you don't want to look at businesses that are 10 and$20 million to acquire. You want to find those small businesses in your area that could be purchased for maybe a hundred, 200,$300 ,000. You want to stay away from seasonal if you can help it, unless it's in a tourist area. You want to look at businesses that are going to benefit from future technology and you adding modern practices into that business.

7:56Because like I said, many, many businesses out there have terrible websites. They have no search engine optimization. They don't do social media marketing. They just exist and sometimes thrive even despite themselves and not having all of these modern tools working for them. So I think that's the important part is learning biz by sell, learning LoopNet, getting involved in some of the localized events where there might be other entrepreneurs there, there might be meetups with real estate investors, and really get yourself immersed in the scene so you can see that deal flow and be able to understand it because you want to be able to get in the mix, get those at bats.

8:36You might look at 10 small businesses and you might not buy any of them. You might not be qualified. You might not be able to get the funding or it might not be the right deal for you. But for every at bat you take, every time you look one up, every time you submit paperwork, every time you go view that business, once you're approved to see where it's at, because remember on these websites like LoopNet and BizBuySell, all you see is a generalized informational page about that business, but you're not going to be able to get the numbers and the books and all of the inside scoop until you go through some due diligence.

9:10They're going to ask you to show that you're cash worthy and that you can get the financing, just like kind of being pre-qualified for a mortgage. They're going to want to see that you have the experience and the know-how. So there is going to be some legwork each time to qualify, to be able to really do a deep dive on that business. But all of this comes with getting into practice and learning the processes of actually going through and acquiring a business. So that's where I would start is through these websites, through really understanding. Like one of the keys is, you know, you see the fake gurus talking about, oh, I bought a laundromat in Wisconsin and I've never been to Wisconsin and it's going to do great.

9:48Don't listen to those tactics. When you're first starting out, you really want to buy a business that's either localized to you or maybe within a one hour drive. Because always remember, as you're first getting started, when someone forgets to lock a door or something breaks or a water line bursts or something, guess what? You're going to get the call and you don't want something that's 12 hours away. And then you've got to go hire some unknown contractor to fix a problem without you being able to have eyes on it. So those are kind of the generalized things in the beginning of understanding the process of acquiring a cash flowing small business.

10:24So the person listening right now, they're on Biz Buy Sell and they find a residential fencing company, right? Company that puts up fences around houses around Nashville, let's say. And they find the company and they think it's going to be a great idea. How do they reach out to that person that's selling the company and how do they begin to negotiate an offer? Yeah, it starts. So if let's say you're using biz by sell, they're going to say request a tour or, you know, you want to get further information. You're going to email a broker is going to get back to you. They're going to say, we'd love to share the address because you don't get the address in the beginning without filling out paperwork because they don't want 100 people flooding into this business's office poking around and then employees find out it's for sale or whatever.

11:07So they're going to require you to do some paperwork. So you do the paperwork. Then the broker gets back to you and says, great. The address is 1234 Main Street. When would you like to do a tour? Okay, you want to see it Tuesday at 1 p.m. Great, let's set up a time. I'll meet you there. So you go, you view the place. By then you're going to have some of the paperwork. You're going to have the P &Ls. You're going to be able to see what really is going on. And then you can go walk the grounds, touch and feel the place, and make sure that the vibe and everything is as described. Because just like every property and home that's going to be on a website, The pictures are going to be this glorious picture where it looks like it's this great oasis, but it might not really be that way because pictures and Photoshop can be deceiving, but it's going to get you to that first step.

11:50Do I like the location? How does the neighborhood look? Are the current owners friendly to me? Do the books look legit? Because one of the number one things and one of the most important things when inquiring a business is making sure that you have real books and real numbers to go off of. So you want to make sure you don't get any third party numbers that are just some Excel file that they printed out on a sheet for you because then the numbers can be fully fabricated. So I always require that the P &Ls that I get are either out of QuickBooks, they're out of the POS, or they're from an accounting firm that are verifiable.

12:26This is very important because everyone's going to paint a picture of rainbows and unicorns on these numbers that look really, really great to you. But you need to get into the woods and look at what is real so you make sure you don't get scammed in the deal. So with your pizza shop, how much did they ask for it? How much were you able to negotiate that number down to? And why did you pick that number, right? Like why was it that number versus a different number? Like what's the valuations sort of perspective there? Yeah, generally what you want to do. So in the pizza store instance, I wanted to get to a place where I could be as close to a one-to-one, 1.5-to-one, or a two multiple because of the fact that that's the easiest way for me to really kind of understand the numbers and lock in.

13:13So what does that mean? So they were asking$199 ,000 for the business. We ended getting that business number down to$145 ,000. and then we got partial owner financing. And it was crazy during the negotiations and towards the end where I knew we were gonna get a deal, it was quite interesting. The broker for the owners said to one of the partners in the deal, he's like, man, that Robert guy just doesn't quit. Like he just keeps negotiating, negotiating and negotiating. You'd think as wealthy as he is, he'd be happy with the deal already. And I was literally negotiating down, what is the broker fee?

13:51who's paying the closing costs on the fees for that, which most people aren't sophisticated to know. You can keep asking for more and more and more because at the end of the day, the worst thing that can happen is they say no and they say, well, we're gonna put it back on the market and then you can backtrack a little bit and make a deal that you're still happy with. So for me, I always want to negotiate to the best possible place I can for myself and my partners because at the end of the day, I wanna give myself as much room to be able to be as profitable as possible for everyone. So in this particular instance with a pizza store, I've been in the pizza business for 35 years.

14:28Some people say, oh, I would never invest in a restaurant. And that's just people that either invested in a bad restaurant or they just don't know what they're doing. Because when you look at restaurants in general, the average McDonald's is generally around a 6 % net net return. And then when you look at a Subway, it might be like a 14 % return. But we've had pizza stores in the past that we're at a 22 % net return, which is huge because then you're crushing all expected gains for investors and yourself. So this particular pizza store, I believe we can operate at a 20 to 22 % net return for myself and investors based on the numbers and the negotiations we made.

15:08So it's really important to know your numbers. And if you don't know your numbers and you're buying a business, then it's really important to either have a consultant to work with or a partner that is the numbers person that can help you really get to the bottom of the numbers. Because in general terms, when you're buying a small business, if you can buy that business for, let's say, a two to three times multiple of the net ownership earnings, then you're going to be in really good shape. And in this particular instance, we were able to beat that because my goal is in 18 months, 24 months, if we build it up to where I believe we can from a gross sales and a net profit margin, I believe then we'll be able to get a three to four times multiple on this business.

15:53Got it. Okay. And that's a good segue, I guess, into the next question here, which is like, what are you doing now to hopefully build it up in the next 18 to 24 months to these higher net margins, higher gross revenue? What are some things immediately that you jumped in and you said, okay, here's what we're doing. Here's why it's efficient. Here's how it's helping and stuff like that. Well, here's the funniest story about this acquisition. when we went there the first two times, one time during the day, and we noticed that the parking lot had weeds two foot tall. There was garbage everywhere in the outlying parts of the parking lot.

16:24And the number one thing that blew my mind is when I went there on a Friday night, I pulled up and one of my partners was meeting me there and the lights were all off outside and it was dark out. So I called him while I was at the stoplight. I go, are they closed on a Friday night? He goes, I don't know. I'm pulling in from the other way and it looks like it. I turn the corner, pull into the parking lot. The parking lot is absolutely jam-packed, nowhere to park, yet none of the lights were on outside. So I was like, this is interesting. This doesn't make any sense at all. So ironically, we take over the week we're talking back and forth and doing the training with the handoff from the former owners.

17:00I asked them, I said, just out of curiosity, please explain to me why the three times I've been here since we've been negotiating this purchase. The outside lights have never been on during business hours. They absolutely looked at me and kind of chuckled and said, Robert, we don't turn them on anymore because the restaurant is already busy enough and we're tired and we didn't want it to be any busier. Yes, it's laughable. Oh, the other part of it too, on the inside of the restaurant, they kept it clean. It's nice enough. It's a small town restaurant, but I noticed they had one TV that was in use and plugged in and turned on, but nothing was on the TV.

17:38The other TV that they had up was a brand new smart TV, wasn't plugged in, and there was no music. So when I walked in the door on that Friday night, you have a packed restaurant. The to-go line for all the delivery drivers was packed, yet there was no music, nothing on the TVs, and all of the overhead fluorescent lights were on as bright as they could be. It was like being in a dentist office. It was so bright. So there was zero atmosphere, yet the place was packed. So last week we had a record day for that restaurant on Friday night. And all these people were DMing me and people were calling me because they saw my Instagram story and they're like, why is the restaurant so packed?

18:15What did you do? And I chuckled and I was like, I turned the lights on and put speakers inside. So there's music and actually turned on the TVs. That is all we've done so far. So it really comes down to when I look at a business, I look at everything. What is the cleanliness? Does that matter? What is the competition in the area? What's their website like? Are they optimizing their marketing strategies through SEO or email marketing or social media marketing? What are they currently doing to create this successful business? And if there's a lot of value add that I know we can do immediately and the numbers make sense, then to me, it's a very exciting opportunity to acquire.

18:53And so just to put some numbers around this, right? Like let's say you guys do 300 ,000 in revenue in 24 and 25, like annually. Like I feel like that's generally a good guess. Yeah, no, they're at 480 ,000 in revenue for 2023. We believe for 2024, we should easily be able to get to 600 ,000 in revenue. Okay. So 600 ,000 in revenue, and then you guys are hoping for a 20 % net margin. So let's call that$120 ,000 in profit. Let's say you do that in 24 and in 25, you then slap a four times multiple on that. Now you're up to a$480 ,000 value on this business that you bought for 150 ,000 or so. Let's just round numbers, call it 180 you bought it for.

19:37That's a$300 ,000 profit that you would make in two years time on buying this small cash flowing pizza shop. So that could be a three or even four X on your money and that call it three or four years. So we talk about investing in these different asset classes. I just want to remind everyone buying a small business is very much an asset class to invest into as well. Yeah. And the one way to look at it, and this is coming from my 35 years of experience, right now, almost all of the influencers and educators out there in business and finance talk about how real estate is the best way to get rich.

20:11And I strongly disagree. I think real estate is a necessity to build wealth, but I don't think it is the best strategy, especially starting out. Because if you look at the average real estate deal, let's say you're buying single family homes as investments, you're going to make three to$400 net per door. So to even be able to think about quitting your nine to five job, you're going to have to own 10, 15, 20 doors to have the cashflow to be able to get rid of that nine to five job. And that's just not the case in small businesses because real estate is a great investment strategy and thesis and should be part of everyone's portfolio, but it is a very long game.

20:51Very, very long because you need to be able to buy and renovate and rent those properties over time to build up that cash flow and capital appreciation. So I love real estate, but small businesses to me are the sure cure way to be able to build wealth much faster because you could take a small business. Think Think about if you were a single person or a husband and wife team buying this pizza store and you knew how to properly operate it and you could turn it from an$80 ,000 a year to$120 ,000,$140 ,000 a year profitable business. That is a really great income that can happen within weeks and months versus years to be able to create that kind of income in real estate.

21:33That's why I always tell people, once you get your base built in investing, I would rather see people then start to really look at either building or acquiring small businesses because is there risk? Absolutely. But is the reward much, much greater than buying a couple single family properties? Absolutely. So in my opinion, get your base built, then go into some small business operations and acquiring or investing in small business with other operators and then start bridging into real estate to have a very well-rounded portfolio. That's my opinion of the best possible strategy for people looking to build financial freedom.

22:12And I think something people don't really understand is the exit multiple, right? Like you mentioned that you want to sell this and call it two or three years. And right now you bought it for like one and a half times profits and you want to sell it for closer to three to four times profits because the margins and the efficiency that you have there. I just want people to know that$10 ,000 or$20 ,000,$30 ,000 extra in profit that you make in 2024, when it comes to sell the business, if you put a four times multiple on that, which is what a buyer might do, that$30 ,000 of efficiency is actually worth$120 ,000 of profit for the investors into this business, right?

22:49This is not just a, yep, made 30 more grand, look at me. It's no, we built and optimized this business and the market puts a 4X value on that efficiency that we made. Therefore, we were able to add that much more at the end of this deal. Yeah, and you have to look at it this way too with a small business like this pizza store. If you're getting a quarterly distribution as one of those investors, you're making money along the way as well. So that money that you're getting every quarter is chipping away at your initial investment. And then upon that exit with that three to four times multiple, then that's really where it accelerates your return as an investor in that business.

23:25And my goal here in this example, in this podcast episode of the Rich Habits podcast, isn't to really harp on owning this one small business and the value of it. It's really to get everyone to understand that once you start buying and acquiring more and more and you get to maybe five, 10, 20 small businesses, Then you're just really creating this massive cashflow machine of profitability. And then you can exit any one of these businesses whenever you feel the business is optimized and there could be the right buyer to get the multiple you want. And that's my goal. Through my community and all of the people that follow Austin and I through the Rich Habits, through the Money Mindset, through his community, there's just so many people that want to invest alongside me and Austin.

24:10And that's why I love this concept of just building up these portfolio of businesses to be able to buy cash flowing businesses, optimize them, and at some point exit them because it's just such a great way to build wealth and a high return, not only for myself and my team, but everyone that invests alongside of us. Couldn't have said it better myself, Robert. What a great breakdown and congrats on the first of many small businesses that I'm sure you're going to acquire over the coming couple of years. This episode of the Rich Habits Podcast is brought to you by Neos Investments. Neos currently offers three unique exchange-traded funds, SPYI, BNDI, and CSHI.

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