227. How to Buy Small Businesses the Smart Way

0:00Ken Goodrich:When Ken Goodrich was 10 years old, he wasn't playing video games at night. No, he was standing in the dark, holding a flashlight for his dad in HVAC tech, while his father fixed broken systems for people who needed help right now. Years later, after his father passed away, Ken bought that same business. One van, two employees, no playbook. Then the IRS showed up. They seized everything, froze every account, 30 employees quit overnight. Ken was left with$3 ,000, two employees, and a decision. Quit or learn how business actually works. Today, Ken has bought and sold over 200 companies, turned bankrupt businesses into market leaders, exited one for high nine figures, and now spends his time doing one thing better than almost anyone alive, buying boring businesses and turning them into cash machines.

0:46Ken Goodrich:I'm Ryan Atkinson and you're listening to the podcast where we uncover the secrets of building and running successful businesses. I am so excited to welcome Ken Goodrich to the podcast. He's got such a great background. It's a topic that a lot of our audience loves. So Ken, thank you so much for being here. So excited for today. Hey, really appreciate you having me on, Ryan. I'm very excited about sharing my story. Yeah, it's going to be so good. And for someone that's like tuning in for the first time saying, all right, who is this Ken? You're a great intro. It sounds like a great background.

1:11Ken Goodrich:Give us a quick background of who you are just so the listener can connect with you. Well, I think you hit the nail on the head with my basic background. You know, I started as a kid holding a flashlight for my dad, working on an air conditioner. And over the years, I certainly learned the trade. I was good at it. By the time I was 16, I was running service calls when I got my driver's license and things like that. And then my, unfortunately, my dad fell ill when I was 25. And so I did my first acquisition and I acquired my dad's business from my mom, which was really me in a van. I was, was devoted to it.

1:45And she answered the phone and she did the books. And, you know, and I started off trying to grow my business. And I knew the trade very well. I was very good at the trade and I could sell the work, but I didn't know the business of the business. So my dad was not very interested in hiring employees, but I had a different vision. I wanted to be an entrepreneur and get out of the service truck and such. So I started hiring people and selling more work and getting more projects. And it didn't take long, maybe a year and a half before I really hit the wall. And I figured out I've got myself a big hole dug and I don't know where to go.

2:21So you touched on the IRS and the 30 employees quitting and such.

2:26Ken Goodrich:And I started over these two guys and they weren't the pick of the litter by any chance. I had to get what I got. And so I worked my way out of the trouble every single day, going out, selling jobs, getting them put in. And then I had found this book called The E-Myth. The E-Myth Revisited by Michael E. Gerber. and it's a staple business book. I think actually he's the number one bestselling business author of all times. And so I got this book and what attracted me to it was, it said, The E-Myth, Why Most Small Businesses Don't Work and What to Do About It. I said, well, this really speaks to me.

3:04And so I get the book and I start reading it. I'm like, wow, this guy must have followed me around, watched me in the bushes because he knew every stupid thing I was doing. And so I took the book. This was before the internet and I applied as principles and I built my business system. And then I went off to the races and I started acquiring struggling and broke companies because they were cheap and I started growing them.

3:28Ken Goodrich:And that was my start. So, so good. And we're going to talk more about that starting, especially buying and selling businesses here. So that is so good. So over 250, you've also have done like a high nine figure exit, which is incredible. I got to ask you, is there one that you are more proud of? Is it the 250 businesses you bought and acquired or the high nine figure X's? Well, you know, the nine figure wasn't bad. That wasn't a bad day. But I've actually built and sold six of these companies. And so the acquisition of these 250, you know, were the culmination of me buying small mom and pop businesses and putting those customer bases together and some of the people to build these six exits.

4:09And now I'm number seven, where I'm rolling up the standby power business generators in throughout Hurricane Alley.

4:17Ken Goodrich:So let's talk about how someone can do something similar. If they're like, holy smokes, this guy sounds awesome. And he obviously has the experience. I'm ready to listen. Let's give him something they want to listen to. Let's first define a boring business. What types of businesses should listeners be on the lookout for if they're looking to acquire businesses and which one should they be ignoring? Well, look, all the money is in the boring kind of dirty businesses, I would say, right? The trades businesses are very valued, mostly the trade services like HVAC, like plumbing, like electrical, like gutter service, like, you know, those sorts of service kind of based businesses are very durable.

4:56Ken Goodrich:They grow every year, expanding customer base. And the best thing about it is private equity has got their eye on it now, maybe over the last 15 years, and they've really been buying them up. So you have a great exit opportunity. As a matter of fact, I exited, like I said, six different times in my career in big exits. But the last one with our business, we drove over a 20 multiple of earnings. Oh, wow. And it's just because the fervor of home services for the PE has, because they look at it as kind of a reoccurring revenue model. They look at it as unsophisticated operators, low use of technology, low use of sophisticated business practices, this and that, these kind of things where they could make a huge impact in their investment.

5:43So I would say the trades businesses right now, trade service businesses is a good place to start.

5:48Ken Goodrich:Give me, expand on that a little bit. I heard the HVAC, but what are some other like trade services people like should be considering just to help them filter in and out? Like what exactly is trade services? this garage door repair replacement you know those kind of businesses where you're working on things in the house home improvement stuff painting and bathroom remodels those are good but me personally i kind of like that the service lead-in where you're having a constant relationship with a customer over time routinely be in their house and then when the opportunity presents itself to upgrade something in the house you're the first guy they talk to and you're likely to get the job So I like that stickiness of the customer there.

6:26But the whole acquisition of business things that I've done is when I first got out of my trouble and I implemented the e-myth book, like I said, I started looking for troubled businesses because I knew how to fix a troubled business because I had just fixed mine. So I implemented the system, the email system, and I went out and started building those businesses. But I bought all kinds of stuff, bankrupt businesses, phone numbers, ESOPs, family disputes, all kinds of interesting stuff because they were the least expensive. But right now, let me tell you this. Right now, anyone looking for a boring business, they need to understand or look up the term silver tsunami.

7:09Have you heard of that? I actually have not heard of that. Tell me what that is. So silver tsunami is a term that's recently come out and it talks about that how, you know, the majority of small businesses are owned by boomers, right? Baby boomers, right? And so us baby boomers are retiring and moving on. And the majority of us don't have anywhere to leave the business, right? They don't have a family member who wants it. It's probably been treated like a lifestyle business. So it's probably not as valuable as they would want it to be. and most people don't know how to go ahead and exit the business.

7:43So the majority of them are just getting shut down. So all these opportunities, these businesses with a rich brand history, a customer base, you know, you start day one and you have revenue coming in and then you can start tweaking and improving the business. They're out there with some very attractive terms if you know how to handle them. So the service tsunami is what everyone needs to be focusing on right now.

8:05Ken Goodrich:I like it. It's a great term. Are you working a nine to five, but dream of entrepreneurial freedom? Look no further than the Uflip Academy, the number one entrepreneurial platform with 20 plus step-by-step courses taught by active business owners, live workshops, hands-on skill training, a business idea database, and a thriving entrepreneur community to keep you accountable. Click the link in the description below to join the Uflip Academy today and make this the year you stopped dreaming and started building your business without guesswork. I want to ask, so if you're going out right now and you're going to evaluate a business to buy, what are like the first two things that you're looking for?

8:46So longevity, you know, if they have a long history of being in town, so do they have brand equity? Can you leverage that brand with some modern day lead generation techniques, right? They're probably not capitalized on that. They're just kind of keeping it mom and pop, but can you leverage the brand. The last company that I built that had the nine figure exit, this company was built in 1939 and they invented the residential air conditioner. And so while the business was essentially bankrupt when I bought it, I'm thinking, Hey, they invented the residential air conditioner and they've been around since 1939.

9:23All I got to do is leverage the brand. And that was the strategy that really drove us up in value. So good.

9:29Ken Goodrich:So brand equity, What's the second part to that then? Brand equity and what's one other thing that you look for? Then we're going to talk about deal evaluation and like post acquisition, but brand equity and one more. So brand equity tied with length of time. So that's synonymous, right? And then you need to look at kind of their pricing profile in the marketplace. So if you run across a business where a mom and pop business, let's say, and they're really underpriced, they're underpriced compared to the market or underpriced based on the math that you've learned from your research, that's a very difficult business to turn because the customer base is typically there because they get to buy it cheap.

10:10And usually cheap means not a lot of profit. And so you got to be careful that they're priced reasonably. The majority of businesses I've ever bought, one thing that really has turned them around is I know the math behind the business. I priced them correctly the day one and I started to make money immediately. But the majority of businesses are way underpriced. So if you're too far down though, like an HVAC company that's charging$78 an hour, for instance, way under market, that's tough to turn the customer base. So you might end up with nothing.

10:42Ken Goodrich:That is a phenomenal point. That is a very, very good there. Okay. Well, so let's just assume the listener right now, they have identified a company that has good brand equity, good length of time, their price pretty good, deal evaluation. What are like some of the first numbers you're looking for when you're open up their book? What are you looking for to see if it's actually a good business or not to buy? So what I always do is I go back, depending on what type of business. So let's say you're going to a service based business. So I go back and I look two to three years, depending on what the last two, if the last two years were declining, I'll look back a three year period and I'll say how many customer contacts or how many jobs did they do by month of job type for 30 months, right?

11:26And I'll look at the trend because look, I look at it like this. You're buying a brand name, you're buying a telephone number, you're buying a URL, you're buying the relationship between the brand name and the customer, right? So really all you're looking for is customers because most of these businesses, they're not going to have people to inherit. You're going to have to probably restaff it or retool it some way. So I wouldn't count on it. Sometimes you can, but rarely, rarely in the smaller ones, you can, you count on bringing many people with you. So you're buying that customer relationship.

11:59And so that's what you look at. And then you say, okay, if I'm coming in and I'm buying these customer relationships and average over three years, a 12 month period, this is how many customer contacts or jobs they have. Then I cut it in half. I just suppose I'm going to lose half these customers. And the reason why is, and I've experienced this many times, when you go buy a new business and you start talking about, you know, there's a new sheriff in town or the old owner isn't there and we sold the company, people run for the hills. Customers, I think they feel slighted. And, you know, I've had situations where, you know, I would talk to the customer and say, look, we're going to take off where Joe left off and we're going to provide better service, blah, blah, blah.

12:45I'm going to give you a free service on our first visits, how to incent them to go ahead and work with us. And a lot of times they'll say, no, they're just scorn. So I cut half out. Then I take a look at the pricing model. So it's certainly a lot easier now with AI, where you can go on chat or whatever and start saying, give me a market price for this kind of company, or give me the mathematics behind how to figure out the pricing methodology for this type of business. And, you know, we've looked at it several times, so usually it's pretty accurate information. Or in the case of home services, there's these things called best practice groups.

13:25So usually before you even buy a business, my suggestion is you go into a best practice group, that HVAC, plumbing, garage doors, electrical, whatever the groups are and get the methodology of pricing and understand the fundamental processes of running the business. So then now you have it. Now you have the math. So then I'm looking at my 50 % of customer contacts and would say, okay, if I apply the correct math on top of 50 % of the same amount of calls, what's the revenue profile look like? And when you do that, usually you actually create more revenue than the old owner did with 100 % of the calls because they were grossly underpriced.

14:02Ken Goodrich:That is like a phenomenal breakdown. That is like expert level type of stuff right there. So listeners, rewind that, take notes on that. Obviously you're looking at revenue numbers in some sense. Some sense you're looking at revenue numbers of like historical trends and then also cutting in half. Is that kind of what I'm hearing there? Clarify that a little bit. Well, I cut the number of calls down in half. Then I apply the new pricing methodology on average tickets for those types of jobs. And I would come up with, I had a half this customer base and charge the proper price, what would my revenue profile be?

14:33So I don't really pay a lot of attention to what they did in the past. Interesting. Because I know it's wrong. And I know that most people aren't making much money in these businesses. They're just making a living, but that's not how you want to run a business. A business should have a healthy return on

14:51Ken Goodrich:investment. For first-time buyers, is there a price range of what you're charging? Is there price range of like exit valuation that a first time buyer should like play in first because it's the easiest or is it all dependent on like obviously income risk all of that but like you recommend like a starting point like look for companies that are valued in the$150 ,000 range those are really tough but I've done all kinds of deals I would say you know if you're going to target something you know target something with at least advertise that's running$250 ,000 to$300 ,000 in profit, adjusted profit.

15:30You go to a business broker, they always exaggerate that. So be careful with that. We can talk all day about my experience with that, but be careful with that. If a business broker has it, just cut it in half. It's a good practice, right? So I'd start looking a minimum three because at least you have something to work with.

15:50Ken Goodrich:Now that said, let me tell you this quick story. There's opportunities everywhere you look, but here's a quick story. So when I first got in business after I bought it from my mother, a key competitor here in Las Vegas passed away, right? He had like six trucks on the road, which that was the big guy in Vegas at the time. And so he passed away and I'm driving my van one day. I was thinking, how am I going to get that? How would I get that guy's business or his customer base? And I said, I know I'm going to get his phone number. So I drive to the phone company and I say, Hey, I'd like to get this phone number.

16:21And they said, well, it's a business phone number. So we have to keep it dormant for one year and allow the old owner the ability to come turn it back on. That's the law. And I said, well, I assure you he's not going to be back because he's passed away. Right. And they said, okay, well, if you can prove that he passed away, we'll give you the number. No way. So I'm 25, right? I'm 25. I don't know how to prove someone died. I'm thinking, do I get my Polaroid camera out and take a picture of who's done or something? I asked a guy, he said, no, go to the health

16:53Ken Goodrich:department and get the death certificate. So I go down there, six bucks, get the death certificate, go back to the phone company, give it to the lady. She says, okay. Then she keys in the computer, charged me$7. So now I'm in at 13 bucks and says, okay, the phone is ringing at your office. So I drive back to my office and my receptionist is not there or she's not sitting at her desk and the phone's ringing. So I pick up the phone and lady said, is this day and night air? I said, oh no, Joe had passed away and we're taking over as customers, but we're an air conditioning company and we're happy to help.

17:28How can I help you? And she's like, oh no. She says, I have a$7 ,000 bid from him on this job. Is it still good? Oh, no way. Absolutely. It's absolutely good. I didn't know what it was, but I'm taking the seven grand, right? I'm getting this thing going. And so I said, why don't I come by the house and meet you and get you signed up get ready for the job. So I went by and signed it up and got it done. And luckily it was a profitable job. And from that one phone number, this is like, remember the story, I got in business, I got ahead of myself, I got in trouble with the IRS, I fixed that. This is when I kind of got out of trouble.

18:06That phone number brought me a million dollars the first year.

18:10Ken Goodrich:I was going to say that has to be a crazy return. I probably acquired 1 ,100 different phone numbers over the years. I used to have people in every market we were in just dialing the internet every single month. By the way, this is a good lesson for anyone. Any of these kind of service-related businesses, just start poking around and finding these old companies that go out of business, get their phone number. And worst cases, you can sell the leads. In one particular case, I bought this phone number for a residential HVAC and plumbing contractor, and he went bankrupt. So I had the number and then the phone started ringing and the customers were saying, well, your sticker is on the water heater.

18:54Your sticker is on the garbage disposal. Your sticker is on the air conditioner. And so I had a non-compete with a business I sold at times. So I started selling the leads. And so I had some friendly competitors and I was selling the leads. I would make them put a thousand bucks each in the till first. So I would work off their money and they were in a round robin. I give them the leads and I was making 40 ,000 a month selling leads off the phone number.

19:19Ken Goodrich:Oh my gosh. I think one of my takeaways here is like get the phone number. I think that's gonna be one of my takeaways for the listener. So stay tuned more for that. There's value in the phone number. You don't have to go buy a big business if you can find the magic phone number. The magic phone number. I love that. That's a great takeaway. Okay, let's just say here we've gone over what's a good company to buy. What are some metrics you look for? obviously after you buy a company is an important phase or process into especially like the first 30 days is there anything that you change in the first 30 days or do you leave it untouched what's your approach to that post acquisition strategy well it all depends on the situation but i would say for the most part and i think for the most part i think you one let me let's go back to something i said earlier you got to decide what business you're going to be in and you got to get some training on that specific business, the business of the business, not the trade of the business, right?

20:14So you understand what the business model is you're going to do. So when you walk in, you're prepared to execute. You can't go in there and try to learn on the fly. It's almost impossible, right? And so most of the time, like I said, I was buying phone numbers, I was buying broken companies, and I didn't inherit most of the people. And generally, most of the people that I could have inherited, they just weren't of the caliber that I needed to grow. You know, they were a sleepy old business and they had their routines and, and they just didn't want to grow. And so I, I, for the most part, I would say in the small business that I've done, we haven't brought a lot of people along.

20:52So what I did before I closed though, is I kind of put my straw team together first. So I closed with a new team. Oh, interesting. Okay. And so here's our news price book. here's our script for answering the phone here's our sales script you know here's our accounting system all ready to go and get it started and the accounting system doesn't have to be you either you can line up with a bookkeeper that does your books but just make sure you got somebody hawking the numbers for you every single day and making sure you're on track yeah the thing is the phone