183. How to Acquire Profitable Small Businesses With a $0 Down Payment

0:00Ben Kelly once worked at J.P.Morgan, where he watched a colleague bringing$2 billion to the bank through a single deal. Huge win, right? But when that same person asks for a three-week vacation to spend time with his family, the bank said no. That moment stuck with Ben. If someone at the top of the ladder didn't have freedom, what chance did he have? So Ben took a different path, buying boring businesses instead of chasing big titles. And now, just a few years later, he's built a portfolio of cash-flowing companies while working only 20 hours a week. This is Ryan Atkinson and you're listening to the Health Flip Podcast, where we uncover the secrets of building and running successful businesses.

0:36In today's episode, we're diving into exactly how Ben finds these businesses, finances the deals, and scales them up so you can learn how to buy your way to freedom too. Ben, thank you so, so much for being here. So, so excited to have you on. Awesome. Glad to be here, Ryan. Let's start at the very beginning. Let's wind back the clock here. What was the moment you knew you wanted to buy businesses instead of climbing that corporate ladder that some people really dream about? Yeah, actually, when you were bringing it up in the intro, so I was working at J.P. Morgan. I had recently gone out of the army.

1:03I was in there for four years as an intelligence officer, got out, jumped into private banking, thought I had made it. This is where I'm going to make great big checks. Everything looks great. And that story you mentioned where the number one guy on our team that was bringing in literally billions of dollars a year into the bank, his client sold his portfolio of businesses to Warren Buffett and he made multiple billions. And my colleague at that point, everyone's giving him high fives. He's definitely going to get a fat bonus. And then that was all great. But then I noticed, as you mentioned, that when he went to go ask for time off, he was told no, because it wasn't a good time for them because there was an event coming up and they needed him there.

1:40Right. And I'm like, this guy just brought in multiple billions of dollars. And yet you're telling him no, when he's asking for a very reasonable request to go and take his family on vacation. And so I was like, no matter how much money I make, no matter how much success I'm going to have here, I'm not going to ever have the ability to manage my own time. Like, it's just very obvious because I wasn't bringing in millions even close. And I'm like, what chance do I have? And so that's kind of what got me started. And so a lot of the clients in that part of the bank, they're all$10 million or more in liquid net worth.

2:10And a lot of those clients I saw were growing their wealth leaps and bounds, two to three acts a year through acquisitions. And those were much larger than where I started, but I just saw it as a way to build wealth. And so then I started jumping right into it in terms of going on YouTube, which was very little information at the time. Buy then build the book by Walker Dibel is probably the bestselling book on this topic. So I read that and just sort of reaching out to everyone I possibly could that seemed to have done it before me. And that's what got me kind of motivated to jump into the space.

2:40Well, let's jump into a conversation off of that then, because you made your first acquisition while working full time. What steps did you take to make that possible while juggling the demanding job? Like working at JP Morgan is not an easy job by any means. So how did you juggle that? Yeah, great question. I didn't have kids at the time. So that's a caveat I want to put there, right? I have four now, but back then I had none. It was just my wife and I. And also the deal that I did was very unconventional in the sense where I didn't go down the path that most of my students and what I'm doing now, right?

3:09This was more of, I didn't know what I was doing. I was trying to just reach out and get any deal anywhere that made financial sense. And so I went to actually LinkedIn and started messaging people that had businesses. And I did them in software. I did it in home service businesses. I was all over the place. But I met a guy who was a former army guy. So we kind of connected on that. He had done a software startup and it was making revenue, but it was really kind of failing to get past that $10 ,000 a month in MRR, kind of like stalled. And I felt that I could help him build a team and raise money and to really scale the services.

3:45And so I basically came to him with an offer saying, Hey, I will give you what I have at this point, which was I put$5 ,000 in. And I said, Hey, I'll give you this. And in return, I'm going to help you build the team and raise money in exchange for a nice minority stake in this company? And he said, yes. And I was like, okay, wow, let's do it. And then over the course of the next 12 months, we grew from 10 ,000 a month to over$120 ,000 a month. And so that one really did, like it was a home run from that angle. So I was still working the W-2 job. Now at 12 to 18 months later, I'm making 150 to$180 ,000 a year from that coming in.

4:21And so that's when I was like, okay, was I just lucky? Was this something where I put a lot of work into it? So it wasn't passive, but I think I could probably do this again. And that's what got me started on it. And we're going to talk about like that next step that you took to like identify more boring businesses. But of course, I have to ask someone, their ears are going to peak up when you said you took them from$10 ,000 a month to$100 ,000 a month. What were like the two growth levers that you pulled to like really get there? And we're going to dive into more boring businesses and finding them.

4:46But talk to us about that first. Yeah. So typically people think, especially with software, you have to just get a bunch of money and throw it into marketing, right? We didn't have that. We didn't have a budget really at all. So I was like, how do I do this? with really not much money to spend. And so that was all through partnership. And so basically, we just went out there and he had already had a surplus. A vast majority of his$10 ,000 a month was coming in from one franchise. And it was an international franchise. And so I'm like, okay, well, obviously you have almost all your users are coming from this one franchise.

5:17You're fixing a friction point that that franchise is having with your software because all these people are using it. Let's just keep on going down that route. And eventually the franchisee is going to take notice. The franchisor will see what's this software that everyone's using, because those franchises were paying. They had to pay through their franchise for another software, but it sucked. And so they were paying that fee and paying us just to use ours. So they were paying double. And I was like, if they're willing to pay double just to use us, there's something here. And so eventually we got enough attention from that franchise that they're like, we want to do a contract with you guys for all of our locations.

5:53And so that's where we really were able to go from 10 to 100 plus a month was really a big contract being struck through that partnership. What would be the actual tip that you would then give people? Yeah, the tip here is don't try to reinvent the wheel and don't try to start from scratch. Try to see where there's already momentum. In this business, it was small, but a 10K a month and most of it was coming from one franchise. That told me that there was something special about the software that was alleviating an issue that that franchise had. The more I looked into it, the more I realized that because of the way that my partner had built it, it really was, especially on their lead management.

6:30That was the part that most, they were all using Google Sheets. Their other software wasn't really helping them in that realm. I'm like, okay, our software is really good at that. And that's something that they're really struggling with. So let's just lean into that. So it's like, hey, if you can refer us to another franchisee who needs this. And we just built it to the point where then we got a meeting with a franchisor and the rest is history. So the action here is look where you have momentum, figure out why you have the momentum, Sometimes you're just like, it's happening and you have no idea why.

6:56So figure out why. And is it something that you can scale within a reasonable cost? And if it's so, go all in, right? Go all in and take your shot. And if it doesn't work, fine, try a different way. But we didn't really have many other options. And so it was more of like, we see we have momentum, we got our foot in the door, let's make sure we knock that door wide open. And I'm sure we could do a whole episode on like growth tactics for that. But I do want to stick to finding boring businesses. And before we dive into like actual places to find it, websites, three things to check for, what makes a business boring in your eyes and why do those tend to be the best to buy?

7:32Yeah, good question. So the boring business is obviously a catchy moniker, but it kind of is underlined by three pillars, right? So we're looking at businesses that are recession resistant. They have some form of recurring revenue and have a barrier to entry. and those three pillars make up the boring business title right so on the recurring we're looking for things that it's not like a sas model so it's not subscription necessarily but if you service a client will they come back again within a year reasonably if you do well right if you're selling that client your service more than once per year then that is a form of in this model of recurring right so an instance of one that doesn't would be if you fix someone's kitchen you do a kitchen remodel.

8:13They're not going to need another kitchen in that year. So that's another 10 years later. That's not recurring. The recession resistant, we're looking for something where it's a service where if you lost your job or you got another job where you're making half of what you used to make, like let's say the recession hits, would you still have to pay for this? Is this something that is completely necessary for your way of life? And if so, I use an example, I live in Florida. If my HVAC goes out and it's summer, I'm spending my last penny to fix my AC, right because otherwise i will probably jump off my roof after about a week and so that is to me like that is a recession resistant business and then the last part is the barrier to entry you want something that through either a geographical hedge at a certain scale hedge or it takes some type of specialized training a license to be able to operate because that's going to stop every you know tom dick and harry from competing against you trying to undercut you on price and so you want something that has that kind of moat around it, that's going to cause someone to think twice before competing against you or to start a new business to compete against you.

9:17Most people spend months, sometimes years, just thinking about starting a business. But what if you could do it in just 10 days? That's exactly what the 10-day business launch plan is designed for. It's a step-by-step roadmap that takes you from idea to real operational business in just 10 days. Click the link in the description below and get ready with your business. business they might be thinking okay i got the pillars i got the idea but like where should people look for when buying businesses for sale mention any websites here social platforms cold outreach tactics talk to us about that yeah so the first one i'm going to mention obviously is one and i have a bias because it's the one that i use i'm a part of called smbmarket.com and what we do with that is there's a couple other websites out there that obviously have volume on it but we'd said let's make an aggregator where it takes because there's like 25 smallest websites most some of that horrible UI UX experience.

10:07So let's just scrape all we can from all these different platforms into one place. So you can log in and you can see all of it going on. You can make notes, there's deal calculators, and a lot of cool things that are coming where you can do your whole search on one spot. So smbmarket.com. But outside of that, I would say that off market is going to be one that people are interested in, but it's kind of a double edge to it. The pro is you're going to get eventually a better price and a better structure for the buyer, bar none. The con is you're going to work about five to 10 times harder to even after you find the deal, you're going to have to, your diligence and financing and everything else is going to take you so much longer and so much more work because the broker hasn't prepared them, the seller, with all the things that are necessary so that that process can happen.

10:51So you're going to have to become the broker in a sense and work with them as you're going through the last three years of their books where like the receipts are all like in a drawer somewhere and it just takes a lot of time and effort. But at the end, you can get a really good price and a really good structure. So if you're willing to put in the work, you can do that through cold email is probably one of the best ones to scale. Then you're going to have cold calling is one of the most effective, most time consuming, actually not the most time consuming, knocking on a door and talking to someone, a person is the most effective, but also the most time consuming.

11:21And they do in direct mail. Those are usually the ways in which people are doing this. We're also testing ads through Facebook. I haven't done it to get a great result yet. So I'm not going to say do that. But the The other ones I mentioned, I've tried them all. They all work. You broke down like which one's most effective here, but I want to talk about like the least resistance of friction just for our audience here. That's going to be that cold email because you don't have to cold call people. You don't have to door knock. I've done both. They both suck. Cold email though, anyone can write up copy here.

11:45What goes into an effective like cold email? And then after this, we're going to talk about what you should check for before considering buying. But like, what do you put in this cold outreach? Just saying, talk to us. Cold email is one of my favorite too because it's the easiest to scale. And so there's two parts to a really cold email and that's effective talking to a seller. Now, reminder, some industries, especially boring ones that have people in their 60s plus that are selling, they don't really check email that often, right? So for those group, you're gonna have to try a different way. But for let's say that someone's sub 55 and actually has email, you want it, one, and this might be counter, like you might think this is counterintuitive.

12:18You don't wanna be sending it from a professional domain. You wanna send it from your Gmail. And there's a couple of reasons for this. One is a lot of times private equity groups and institutions are constantly reaching out to these healthy small businesses to try to acquire them. They have a very canned message coming from a professional domain. And a lot of times these sellers, after they have conversations with like the mid-level analyst that's talking to them, they feel kind of just like demeaned and everything else throughout the process. Like they're reducing their business into just a couple of questions on the spreadsheet.

12:47And by and large, they just don't like the corporate feel of a private equity group reaching out to them. They do like though, however, if you send it from a Gmail, you're just a normal person, right? And so the other part of this is that the deliverability actually is better because you probably had that Gmail for the last 10 years. It's going to have great deliverability. And so you can scale in much quicker. Anyway, so first part is from your Gmail. Second part is you want to write the letter, not as a professional. You want to write it as just a person. So you're introducing yourself just like if you were knocking on the door.

13:15Hey, my name is Ben. I'm married to Ashley. I have four kids. I live in Southwest Florida. I'm interested in your accounting firm because of X, Y, and Z. And I heard about you through this way. And I think that you have an amazing team and I would love to learn if you're interested in potentially selling, right? And so you're starting off with who you are, what type of person you are. And then the second half is what you're looking for. So you have to put the relational before the transactional. If you do it that way, and we've tested all different types of ways, we're going to get somewhere in the realm of a 15 % response rate from these emails.

13:52And that typically turns into for every hundred emails we're sending out, we're getting anywhere between two to three meetings. Now, those two to three don't always turn up into LOIs, but that's kind of what we're looking for, where if we try it other ways, it's even less than that. That's something you can scale. That's a really good breakdown right there that I really, really like. Of course, though, you can have all this, but there are some things that personally you need to consider before seriously considering buying a business. So what are those top three things that people should consider when they're evaluating a business, being like, should I buy this?

14:21Should I not? What should they look for? Yeah, good question. A lot of times before people start getting into the search realm, they need to kind of evaluate themselves. Like, what do you want? And I think if people jump in fee first and they're just excited about a thing like, oh, this builds wealth. So I want wealth. So I'm just going to jump into it. When in reality, business acquisition is hard. It's not a sprint. It's a marathon and it's grueling. And when you're dealing with people that are selling, especially small businesses, you're dealing with people's emotions. You're dealing with people's baggage.

14:54You're dealing with people, like when small businesses, like their families, right? So like their son works for them, their cousin works for them. You're dealing with a lot of dynamics that is not clean in any transaction. And so when you're looking at this, one is, do you have the time necessary to dedicate to this? This is going to be at least six months of your life of focus, right? Now we ask that people do at least just one hour a day. If you could do that for six months straight, that seems to be the amount needed to at least get your first deal done, right? So are you able to do the time?

15:25The second thing is going to be what amount of return makes it worth your time? And so are you doing this for$50 ,000 of cashflow a year? Is that enough? You might say, heck yeah. Or you might be like, yeah, right. That's nothing. Right. And so figure out what that number is. If it's a hundred thousand, 500 ,000, a million, whatever, everyone's different. Once you find out that number, now you can kind of reverse engineer what that's going to look like. Okay. So if you want$500 ,000 in cash flow after debt service, cause you're taking on a loan to buy this, that means this thing is probably doing around 750 of cashflow before you took on the debt, which means this thing is probably worth some of the realm of two and a half to three and a half million, depending on management structure.

16:03If you're going to do that deal, do you have 10 %? So 250 to$350 ,000 that you have and are willing to put towards it. Now there's ways to structure it where you don't have to put that in, but that's where, especially working with a lender, they're going to look at you and say like, are you a candidate? Are you serious? Do you have the means? And so doing all that thought process to figure out how much time, how much money do I need to make? And knowing those two things, do I have the ability to do this? And if those are all yes, awesome. Take the step to move forward. But people need to take the time to do that self-evaluation because then for a lot of people out there, the answer should be, no, this is not good.

16:39This is not right for you now. You're 18. You just graduated high school. No bank is going to give you a$2 million loan. You probably should go out, get a job first, get skills, and then leverage this in the next five to 10 years. So that's where people have to look at. And that's actually leading us to the next question I want to ask here is about financing this. How do you actually throw funds at this? How do you get money to do this? So what are the best financing options for someone buying these businesses, especially if they don't have much cash on hand, like an SBA loan, investor, seller financing?

17:08What's the best way. Yeah, all of them. So the way that we typically structure a deal is going to be kind of a trifecta. It's going to be SBA, it's going to be seller financing, and then there's going to be some type of buyer or investor injection. And so a very simple model would be 80-10-10, right? 80 % SBA, 10 % seller financing, 10 % investor slash buyer injection. And so there's different ways to do it, especially like on the seller financing side, there's certain rules within the SBA sphere where the seller note is more than 10 % or more of the purchase price. and you're able to structure it in a way where it's on full standby for two years or more, which means there's no payments for the first two years.

17:44They see that that helps your cashflow because there's no payments on it. The bank sees that as lowering the risk and increasing cashflow. So that counts towards your buyer's injection of capital. So instead of having to bring 10%, which the SBA kind of requires, kind of, you can now only bring five and they're fine with it, right? And so there's ways to go around it, but typically that's how it's happening. There's also people doing 90 % seller finance, 10 % buyer investor injection. Those happen as well. But typically, like you said, the trifecta is SBA, seller finance, and then buyer injection.

18:16Progressing through this conversation though, I want to talk about running the business post-acquisition here. So after buying the business, I mean, you described in that first one, you took it from$10 ,000 a month to$100 ,000 a month, which is just incredible. How do you figure out what needs to be improved and what's already working when you do get into the business? Yeah, great question. So the model that we do, I want to be very clear. We are not buying turnarounds and we're not doing flips. We are buying good businesses that have at least three years of showing consistent revenues and consistent profits that are increasing year over year in an industry that kind of meets our three pillars.

18:49And so these are, when we talk about small businesses, sub 10 million, these are the lowest risk category that we're going for. So post-close, they have a team, ideally, that's already in place. Now, the businesses that I recommend my students go after, they already have a general manager running the day-to-day that conveys after the sale. So day one of you owning this business, you shouldn't have to really do much in terms of you're not running anything. You're not turning the widgets or making the widgets. You're not doing anything. Now, there's a lot for you to do, which is get to know your team, start creating systems and processes, because most of the time, all those systems and processes were not documented very well.

19:24They were mostly in the head of the seller or in the head of the GM. And so you need to start extracting that, building a process that can be repeated and start focusing on training, start focusing on metrics and KPIs and understanding exactly how this business runs and what its true margin is and how you can scale it. So the first 90 days after the acquisition is you being the sponge. You're just learning as much as you possibly can about this business. You're not making any decisions that are changing anything dramatically. You're not firing or hiring. You're not doing anything. You're just sitting there and learning and asking a lot of questions.

19:55after the next 90 days is now when you start to take all that data and start to formulate a strategy on how you're going to make this business better. Do you need to hire now? Or did you find out that Kevin over here is dragging the whole team behind it? Kevin needs to go. You're going to start to understand what you're going to do. And then after the first 180 days, you're now in a position where you can start to make meaningful decisions about this business. And you can start a new marketing campaign, or you can start to hire and fire. You can start to look for strategic partnerships. Because at this point, you've got the data, you've been able to kind of create the plan, and now you're ready to start to implement those changes.

20:31So it's very much a phase one, phase two, phase three process. And it's something where the first 90 days after any acquisition is very much just you not messing anything up and just building as much rapport as you can with the team and with your general manager. Because the last thing you want to do is walk in, start kicking stuff over. Everyone hates you. People start leaving and the business literally can nosedive in those 90 days. Right. So you have to maintain that stasis at the point of acquisition. Yeah. That's what I was actually curious about. Cause like a lot of times I feel like when people start something new, they're making changes like right away.

21:05Cause they're like, there needs to be like a feel of change here, but yours is more like, let it soak in, take a breath, like just evaluate the business. And, but after those 180 days, that's when you really need to start going. Yeah. Cause remember you're buying this because it was a good business, right we're not going for turnarounds we're not going for flips you bought it because this thing was just making great money had a great team a great product great reviews so the last thing you need to do is the day one walk in and just start like kicking stuff over like that's the last thing you want to do you want to go in there and build as much rapport as possible with your team have them to start to slowly transition seeing you as an kind of like an invading force into oh this person actually cares about us and wants to grow this business and we're all going to win if this business grows and aligning incentives and everything else.

21:48A lot of times I recommend starting off with giving your GM a bonus, start to increase the salaries if you can within the cashflow for everyone that's inside the business. So day one, they see this as a net benefit to them and their families, not like worrying it's tomorrow. Is he going to get rid of me type thing? That is really, really good advice there. But it sounds like you would always advise people that are looking to buy, like make sure there is a general manager in place or should first-time buyers run it themselves? I mean, what's your approach to that? Good point. So there's definitely people out there and I have students who want to be owner operators.

22:19Like they want to do that as their full-time gig. And that's a lot easier to do. Most businesses out there are basically just running off the back of the seller. And so if the seller sells, it's pretty much worth nothing unless you become the new owner operator. Now, if you want to do it the way that I've done it and the way that I focus on doing it, because it's only scalable if you're not the one running the day-to-day, right? And so where I'm looking for businesses that are large enough to have enough cashflow, that have a general manager who's managing the day-to-day. Now, if they don't have that, let's say that the seller is doing that, is this still a good deal?