Do you want to know how to effectively negotiate the sale of a business? In this episode, Clay Clark is going to give you the 10 steps you need to take to purchase a business in the most effective way.Sign Up to Watch
-But they're going to view all this as, sort of, BS. They're going to say I don't believe you.
And you want to have that accountant who, kind of, raises that eyebrow a little bit. He's like, well, I don't know about that. I don't know about that.
You want that accountant who's, kind of-- He's got to be the kind of guy with very little hair on top. He's got to have hair mostly on the sides. He's, kind of, well, I don't know.
But you want the guy who's got the pocket thing going on here. He's got the pens, he's got a variety of pens. He might even have a TI calculator in there. And he's the kind of guy, he's got like a-- he's wearing, like, a bow tie. That kind of guy.
And he's got a short-sleeved shirt on. And that's the kind of guy you want. You don't want to work with a guy who's-- you don't want to work with a guy like me.
You want to deal with a guy who seems excitable. You want to deal with the accountant who's just like-- he's got the one eyebrow raised and he's like, brass is BS.
-Got to have HP12Z.
-You want a guy who is a little bit crotchety to be your guy here. Some making sure when you get the guy, get a guy who's just old, seen it all, done it all. Negative, sarcastic, cynical. A guy you probably don't want to go out for a beer with, that's the guy you want to be your accountant on this.
OK, I'm just been real. OK.
Now principle number five is you want to determine a price that allows you to be nearly guaranteed you won't lose money. OK? What am I talking about?
Well, I'm saying, at the end of the day, let's say, the accountant comes back. This is what's going to happen. This guy's going to say the business is worth $300,000. Your accountant is going to come back and say nope, it's worth 200.
If it's worth 200, buy it at 150. Bring it down again. Bring it down 15%, 20%. Buy it at a price where it's so freaking low that even if you are the worst business owner in the history of American business that you still will be OK.
You want to factor everything going to hell because here's the problem. A lot of people they buy these small businesses and the business is called-- we'll call it TJ's Grill. Let's go TJ's Bar and Grill. That's a prite better.
Then you put an E on the end of it so it feels fancier. TJ's Bar and Grill, this is the restaurant, right?
So everyone loves TJ's. TJ's has a little bit of a following. Every night, people come into this restaurant.
And they're walking in the door and they're going, man, I've been coming to TJ's Bar and Grill for 27 years. And I love TJ's Bar and Grill because there's TJ, there's a bar and there's a grill. You know, got TJ, got the bar, got the grill, got the trifecta going. One, two, three.
Well, then you come in and buy it. And you change the sign, you know, because you're going I'm not TJ, I'm David. You know, so you, urt, urt, urt, urt. You know, you put up here David's. All you did was change a couple of letters, David's Bar and Grill.
People come in, they're going where's TJ? And you say, he's no longer. I'm the new owner. And they'll go piss off, I hate you. And you're like why? Because I don't want change.
And so you'll lose a lot of customers just from new management. A lot of businesses. So when it happens, what happens is your revenue? It comes down, your revenue goes way down.
But most businesses, when they buy-- most people, when they buy a business-- I'm just going to say this-- the first year-- no matter what research stats you look at-- they're going to lose at least 20%, on average, the first year of revenue. You know, so when you buy a business, you going to do 20% less revenue the next year.
Why? Because you don't know what you're doing. You know, we've never had a bar, never had a grill. We're not TJ, we don't have the blue sky. We don't have, kind of, that swag.
We don't have-- no one in the neighborhood knows us. We don't have the goodwill, we don't have the loyal customers who just come there because they like you. TJ probably has people driving 27 miles to get a hamburger on Tuesdays because they've done it for 10 years. But people aren't going to do that for you. They're going to be, nah, I'm looking for a new place.
So I'm just telling you, the new ownership thing, just be careful of that. OK?
Now the next model, the next thing we want to in factor in here, is you want to bring as little cash as possible. As little cash as possible.
Now Warren Buffett says this quote. He says I have pledged to you-- this he is talking to his shareholders-- I have pledged to use, the rating agencies and myself, to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers, a.k.a. bankers, in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits.
What he's saying here is that TJ might have two locations. And he might say, hey, you know what? I've got each location for $150,000. I'm willing to sell them to you though as a combo. I want to sell both of them to you for 250.
And you really know, financially, you don't have enough money to buy that was enough reserves. But you're like, well I could stretch. And then you get yourself in that mind.
So what we want to do is we want to put as little cash into the game as possible. We want to keep our cash very little down, little down. Just very little down.
-So how do you put little down? Well, you've got three primary ways you can buy this business quickly without a lot of money down. So I'm going to give you an example.
One is you say owner finance. So you do is you go to the guy and you say, hey, guy, I'm going to give you-- let's say you want to buy one of these for 150. You say I'm going to go ahead and give you a 10%. Now, I'm going to make payments every month, not to a bank, but to you.
So you can go on your boat, and then you can go retire. And I'm going to pay you. I'm not paying the bank. I'm paying you directly.
Well, the benefit for him is that you're going to make payments to him, plus interest-- is that he might be able to make a little more in the end. But the benefit for you is you don't have to deal with the bank.
Now, option number two is you go out here and you say, this is traditional finance. And this is a deal where, again, what you do is you say, I'm going to go down. I'm going to put 20% down, usually is what the bank requires. Sometimes more. 20% down, plus payments and interest.
But that model sucks in comparison to this, because you have to talk to the bank. The bank's going to want to see all your tax records. They're going to want to hold you accountable all the time. They're going to have minimum balance checking, where they'll check on you all the time.
If you don't have a certain amount in the bank, they're going to have oversight looking at your numbers. They're going to want an updated P&L. They're going to want financial statements.
So a lot of times, that, for a lot of entrepreneurs-- I mean, I think we need to mature as entrepreneurs at some point and start to do that stuff. But owner finance is the best. The second is financing through the bank. So this is the bank finance option.
And the third is a rev share. So what you're doing is you're saying, hey. I, TJ, I'm going to go ahead and pay you 10% of all the gross revenue, or 5% of all the gross revenue. Not the bottom line, but the top line. 5% of all gross revenue until you're paid back. And I'm going to come in with just a very little down. I might even put 5% down so that you know that I'm not crazy.
So under these models-- and you see this all the time in big business. A lot of times you see in new stories, they say, such and such was sold for $1.5 billion. Well, did somebody really write a check for $1.5 billion? Did somebody actually transfer? A lot of times, no. They just say we're going to share revenue. We're going to give you some stocks.
The point is if I could choose perfect, my perfect world is this one. For any entrepreneur out there, it's revenue share, where you say I'm going to give you 5% of the gross revenue until I pay you off, because that's the least risk possible. It's a sweet gig. I mean, you can get in there and be a serious-- you can make every mistake possible and still stay in the game.
The second is owner finance. If I can get owner finance, that's a sweet gig too. And the third, the least desirable, is traditional financing, in my mind.
Now, somebody else watching this might be, well, I prefer traditional financing. That's fine, because you work at a bank, and you like the suckers. And you go in there and you do the night drop deal. You like that whole culture. That's cool.
But I'm saying is for the average entrepreneur-- because a lot of entrepreneurs have a ton of ambition and not enough money to keep up with it. So this is a great way to get in the game without having to mortgage your house and all that kind of stuff.
And under these models-- make sure we're getting this. Under all of this, everything I've just said to you, use an LLC to buy that business. Do not buy it personally. Do not buy it personally. Do not buy it personally.
If you buy it personally, you put yourself in a bad spot, because when somebody comes into our restaurant and twists their ankle, they're going to sue something, and hopefully it's not you personally. Does that make sense?
-Yes. I have the LLC in my pocket.
-Bam. Now, the next thing we want to talk about here, principle number seven, is never buy anything personally if possible. We just said it. But it's a principle, I'm going to say it again-- never buy anything personally, if possible.
Robert Kiyosaki says this-- "Never say you cannot afford something. This is a poor man's attitude. Ask how to afford it."
So I'm going to give you a whole bunch of ideas real quick. I'm just going to just phantasmagoria.
Conrad Hilton-- aka, Hilton. That's the guy who started the Hilton Hotel chain. He bought a hotel with almost no money down. His first hotel? No money down. It was all a rev share. Boom.
And he continued to do this move forever, because people, when you're ready to sell a business emotionally, you no longer like the business-- you're like, I hate the business. I hate the hotel. I hate the way it smells. I hate when people say, excuse me, do you have a towel? No, I don't have a towel.
People get surly. You know what I mean? Guys like me are like, hey, do you guys have a toothbrush? And I come back two minutes later. Hey, do you guys have any deodorant? Come back two minutes later. Hey, is there any way that-- I mean, can you valet my car?
I mean, I swear-- you know, people who are wanting to sell their hotel, they're pissed.
-So this guy wanted to get rid of the hotel. He was very pissed off. And Conrad goes up to him and says, hey, I don't have any money. He didn't say that, but this is the idea. I don't have any money, but I'd like to share it-- I think the way he phrased it was, hey, I'd love to run your hotel. I realize it's stressful for you. I'll run it and I'll pay you 5% of the gross revenue until I pay you back for the whole thing.
And they're like, really? Yeah, you're done. So I could leave today, right now? Yeah, you never have to come to work again. Sweet! And then the guy is getting the hotel. So that actually is a real story that happened.
Another guy named Ruffin-- I'm hoping our program observer can add this to the glorious screen, here. He's the guy who bought the Treasure Island Casino, there in Vegas. He's worth billions of dollars now. This guy bought his first gas station with this model. Again, no money down. He's like, hey, you know, I don't have any money. But what I can do is I can work for it I can-- OK?
Another guy who got into the game this way. It's a little bit different but-- Starbucks, what? Yeah, these guys ran Starbucks for years and it was very unsuccessful. They sold roasted beans, and they sold coffee grinders. They never thought they would sell actual retail coffee to people.
And Howard Schultz comes in and he's like, I'd love to work here. And I'd love to grow this thing. He didn't have a whole lot of capital. He put some capital. But more of it, it was like a sweat equity deal. He's going to put his time in, he's going to put his energy in. He's going to put a little money, but mostly time and energy into it, in order to build his empire.
So these are three examples that have really happened that are people that put very little cash into a deal. And so, don't have the money-- what Robert Kiyosaki is saying is, he says, never say you cannot afford something because that's a poor man's attitude.
If you want to buy a hotel-- and just for a fun story for you. Conrad used to go by the name of Connie. You know, his mom used to call him Connie. And he, previously, he had opened a bank in his, like, early 20s. And it failed. And so he was, like, well I guess the next step is I'll buy a hotel.
So he had no money and he had just failed in a bank, but yet he had the audacity to believe he could afford it. So you have to have that mindset to believe that you're not stuck. You have to view your current circumstances as just an illusion, and you can change those.
Now Robert Kiyosaki, he wrote the book "Rich Dad, Poor Dad." Best selling author. Unbelievable. His early books offer great early financial advice. I highly recommend you read the "Cash Flow Quadrant" and "Rich Dad, Poor Dad" by Robert Kiyosaki. Some great books.
Now, the next, is you want to establish a win-win. Win-win? Why? Because we're going to have to have this thing called grace. So I'm going to give you an example.
If we go back to that restaurant example, and you buy the restaurant. But if you negotiate to the point to where the seller is not happy. And you're happy. Oh, you're happy. You are happy, you. You got a good deal, he got a bad deal. You got a good deal, you're pumped.
And then, about four weeks in, for some reason your grill stops working. You can't figure it out. Just, the grill doesn't work anymore. And you're having mechanical problems. You're starting to have some issues.
And so you go to the guy that you just screwed over and you took advantage of, and you say, hey, could you help me? I've got a couple issues, I want to pick your brain. And he says, no! Because you screwed him. He doesn't want to help you, that kind of thing.
But if you reverse the situation and you guys build a great relationship, where he says, oh I love this guy, you know. I guess that's kind of a weird smile-- but he says, I love this guy. He's-- there he is, he's smiling. He's kind of smiling like Darth Vader, but he's smiling. Then, when you have issues, this person is happy and willing to answer the phone-- that looks very much like Darth Vader. But he's happy, he's having a good time.
And the point is they're more willing to help you. And you're going to need some grace when you buy the gym, where you buy the business, you buy the liquor store. You're going to have a problem. And you want to have a win-win so that you get a reputation as being a guy who's good to work with. So you want to get a good deal, but you don't want to just screw people over to the point where they hate you. You don't want to screw them at all, actually. So we want to make sure we get that win-win.
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