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- [00:00]
Austin Hankiewicz
Hey everyone and welcome back to the Rich Habits Podcast, a top five business podcast on Spotify. My name is Austin Hankiewicz and I'm joined by my co host, Robert Kroek. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over $300 million. 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 episod episode we talk about Rich Habits as they relate to business, finance and mindset. However, we try and bring you two unique perspectives. One 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. Now, Robert, before we jump into today's episode of the podcast, I want to remind everyone, especially if you're new around here, we've been dropping some gems lately. We spoke with Harley Finkelstein, the president of Shopify, in last week's episode. The week before that we had a banger of an episode where we had a bunch of side hustle ideas for busy parents and other entrepreneurial minded people. And then even the week before that we talked about buying real estate like a pro. So if you're not following the Rich Habits podcast and tuning back in every single week, what are you waiting on? These episodes are always so much fun to record and we love publishing them literally every single Monday. So be sure to hit the follow button. And if you're learning stuff, be sure to share it with a friend as well. So Robert, what are we talking about in today's episode?
- [01:28]
Robert Kroek
In today's episode of the Rich Habits podcast, we're going to cover the massive opportunity in buying cash flowing small business businesses. Over 3 million baby boomers retire each year and tens of thousands of profitable small businesses will be left unsold due to their lack of succession plans and not knowing how to sell their businesses. So we're here to break down the numbers and strategies for all of you who might be interested in cashing in on this amazing life changing opportunity.
- [01:59]
Austin Hankiewicz
You know, that reminds me, Robert, you all might have seen the Wall Street Journal publish a spotlight piece. It was called Americans New Millionaire. Talking about sort of these electricians and H Vac business owners. I'll be sure to link out that article in the show notes below if you want to go read that. But essentially it explained that now more Than ever, large private equity firms are going around the country purchasing for millions of dollars these profitable small boring businesses like H vac companies, electrical, plumbing, things like that, allowing their owners to cash in on their lives work. Now we'll get into the nitty gritty of why they're doing this and the profitability behind it. But more importantly, Robert and I want to make sure that spend this episode walking through how if you're someone listening who's a little entrepreneurial minded, maybe you dream about owning a small cash flowing business. How you can do this yourself, not private equity backed and in a very responsible manner, allowing you to build wealth throughout your life.
- [02:56]
Robert Kroek
That's right. We're going to dig into the five topics that we think are the most important when doing this strategy. Number one, defining your buy box. What do you want to buy that you feel fits your skill sets and your desires and your passions? Number two, how do you find the deals? Where do you look? What websites to use? Number three, how do you contact them? How do you find the business owner's information so you can start the process of negotiating and digging into this business? Number four, how to evaluate them. How can you figure out what that business is worth? Is it growing? Is it a good fit for you? And then number five, how to negotiate the handoff and the numbers when purchasing this deal.
- [03:41]
Austin Hankiewicz
I'm super excited about this episode. Whenever I think about building wealth and eventually retiring one day, it all comes down to owning equity in cash flowing, growing businesses. Now we all know the easiest way to do that is by buying stocks on the stock market, right? I can go buy a share of Apple or Amazon or Microsoft or Nvidia. And I own equity in these businesses that spit out billions of dollars of cash profits every year to their shareholders, which are why the stock prices go up. But this is sort of doing that on a much smaller scale. Instead of buying a share of a business, you are actually going out and buying the business itself. So instead of just having a little bit of a dividend paid to you on a quarterly or annualized basis as a single shareholder, you now can realize all these profits and the cash flow that comes with owning these businesses entirely yourself. So there's a lot we're going to cover and we're really excited about this episode. So Robert, why don't you kick us off with the first point of determining your buy box?
- [04:35]
Robert Kroek
Yeah, I love it. And what a buy box is for someone that is new to going out and looking to acquire businesses is to determine what you're looking to buy, what price range that falls in, what skill sets does it align with? With yourself? Because you don't want to go out if you've been in the trades or maybe you've been a teacher your whole life, and then all of a sudden get into the restaurant business. You want to try and find a business by building that buy box that aligns well with your skillset, but also your passions. So it's something you're going to wake up every day and be excited about because you're bringing value to that business. So you want to determine a buy box so you know what you're going out to look for, rather than just randomly researching hundreds if not thousands of businesses. Because too many people do this and they look for a business that might fall in their price range, but they know nothing about the industry. And just because you made a pasta bake at home one time does not mean you're qualified to run a restaurant. So let's get that straight. You want to make sure, in the beginning at least, is to find a business that aligns with your skillset and your knowledge base. And then when you get to a higher level, like someone like myself that's bought dozens of businesses over the years, then you can go out and try different sectors more because you're going to have a team built in place. You're going to understand what your value adds and how you can make this business better. So that's why it's important, number one, to determine your buy box so you know what to start looking for.
- [06:03]
Austin Hankiewicz
I feel like a lot of people listening right now might say to themselves, oh, I don't know anything about running a car wash or a restaurant or a laundromat, but I can just hire for that. I can just go hire a manager that can do it. And you might be right. I'm sure there are people that are very skilled and would love to come work for you and build this business with you. But remember, every person that you employ is money out of your own pocket as sort of owner's equity right after tax profits. So be aware of that. But also too, finding those people, I'm sure could be very hard and time consuming as well. So being able to identify the types of businesses that align well with your own skill sets, your own experiences, your own sort of unique knowledge and specific knowledge, rather, is the best way to go about this. So for me, maybe if I was to go buy a cash flowing business, I would go find maybe like a podcast rental studio, right? I know a lot about podcasting I've been doing this now alongside Robert for a while. Right. That could be a very easy sort of unique skill that I know pretty well and I'm pretty good at right now.
- [07:00]
Robert Kroek
You alluded to a great point, and that is so many people reach out to me that have 50 or $100,000 and they want to go buy a small business. They might have 200 grand and then they think they can just hand it off to a manager, collect their check and it's mailbox money. I want to make sure everyone, before we get further into this episode, that understands that's almost never the case. Because one thing that I have learned over decades of owning small businesses, and I've in the last 10 years changed, is you want to have partners. You want to have active partners that are managing partners that can help you with the business. So just keep that in mind that you can't just hire it all out with these small businesses like the fake gurus say, because you'll never make any money and you will constantly be chasing the dollar if you're not willing to get in there and do some of the work yourself to learn the business and be able to understand the business. So that goes to number two, how do you find these businesses? My three favorites are LoopNet, Biz, Buy, Sell, and for more commercial real estate and multifamily, crexi.com c r e x I.com so think about these websites as like the Facebook marketplace for small businesses because you can go out there, you can find all kinds of listings, you can start earmarking them and really get an understanding of what's available in your area. Now a couple things to note. Number one, make sure you're wary of scams. There's so many scams out there all over the place. And we'll get to that later on in the episode. But I just want to make sure that everyone has a warning of that. And number two, understand that when you go to these websites, when you find that business that you think is cool, you might need in most instances to put in some personal information to let them know that you are a viable candidate to buy the business before they release any information like the owner's information or the sales or even the location of the business. So don't get scared off by being asked to place some of this information. They just want to make sure that you're not a tire kicker and that you actually have the ability to buy that business. So you might go and you might fill out this form for three or four Brokers, you get five or six listings out of these brokers and then you're going to go do what we call driving for dollars. It's one of my favorite things to do and it's just a really good way to understand an area and understand the business before you start negotiating. I hear all the time of people saying, oh, I bought this business site unseen or you know, I never had to step foot in the business. Don't do that. Trust me, you don't want to do that. I looked at a convenience store recently. It looked great on paper. The owner and the broker were great. We did an initial call, I drove the area a couple days later. I wouldn't have touched it with a 10 foot pole. The area was on its way down. There was just a lot of just bad elements in the area. So be careful there. But those are the three sites I like the best to really start the process of finding these small businesses.
- [10:00]
Austin Hankiewicz
Yeah. And if you're someone who maybe doesn't trust websites, so you don't want to get in the weeds of all this stuff. You just want to start from scratch and drive around your town or sort of these up and coming areas. Right back to what Robert was saying. When it comes to driving for dollars, I mean this is a great opportunity to find those laundry mats, the car washes, the tire shops, the med spas, the dog grooming businesses. Right. There's so many of these like small businesses that we all pass on the way to work every day, on the way to our favorite restaurants or wherever we're going. But now we're looking at them from the perspective of, hmm, could this be something I'm interested in? Could this be something I'm good at doing? And if not this, where else could I drive and look around where I could potentially find a viable small business to learn more about?
- [10:44]
Robert Kroek
Yeah, I love that the Dr. Driving for dollars part, but it really does change your mindset. You alluded to that and it's very important because so many people and I talked about this the other day on Instagram, think that what they should be doing is looking to build this new big, huge business and they're going to build the next Facebook or they're going to build the next Nvidia. And yes, maybe some of you can do that. But it also is a great strategy, like I've done for 20 years, to buy existing cash flowing businesses. It's so important to understand that because they're already established, they already have a name. You go driving for dollars, you check it out, you see, I start asking around, I immediately go in and talk to some of the employees and say, oh wow, this is a cool business. Who owns it? How's it doing? You will learn a ton from the people that don't know that you're looking to buy it. So I love this strategy and I just think it is a great way to get you started and get you out there to take those at bats. You guys always hear me talking about take the at bats. You might look at 20 small businesses and never even come close to buying one. But with every at bat you take in looking at that business, you're going to learn a little more how to negotiate, what it means, what are the numbers, how do you get the best numbers out of these people early on so they don't think you're the fool in the room. So all of that is very, very important.
- [12:06]
Austin Hankiewicz
Totally agree. Now let's assume you've found a cool business you really like. How do you actually go about contacting them?
- [12:13]
Robert Kroek
Robert yeah, there's a lot of ways to do this. If you do it through the websites, you fill out the information, they're going to give you some cursory information in the beginning, probably the location, maybe the owner's name tell you to go take a look at it. They might want to set up an appointment with you to go take a look at the business. I generally try to get the address first because before I engage with an owner or their lawyer, I want to make sure it's even a good fit and it's something I would want to negotiate for. So that's where you start. But also you can look at going and skip tracing. You know, Propstream is a great website you can use if you want to skip trace a phone number or an email address for an owner. But also just stopping by the business. Say you get the broker information and they pass along where the business is located. You drive by, you like it, you're not sure about the broker. Whatever happens, you can definitely look at skip tracing this information or do a Google search. You might be able to simply say who owns this laundromat at 1234 Main street and you might be able to find it right away. So that's where I start when contacting them. Because you want to figure this all out in advance because you want to give yourself as many advantages as you move along the course of trying to buy this small business. And so getting that contact information is very important. And the same thing goes for real estate. You can go use a site like crexi.com that I alluded to. Find a property, go out, maybe use Propstream to skip trace the owner's information, give them a call. You can look up some of these scripts of the best ways to negotiate and talk to them in the beginning. Because at the end of the day when you're looking to buy small businesses or real estate, always remember this. Don't negotiate against yourself and don't be afraid to ask for what you want. Because there's an old saying, in life you don't get what you deserve. In life you get what you negotiate for. And you would be shocked at how many people on the other end of the negotiating table from you might be in a bad situation. I've found businesses where owners were three days away from foreclosure, two weeks away from eviction and they are willing to work magic with you to try and buy it. And the worst case scenario is you offer what you feel is fair or what works for you and they tell you to f off because at the end of the day you just start renegotiating from there. So I think it's very important to understand that aspect when you're in the contact stage and moving forward.
- [14:40]
Austin Hankiewicz
Yeah, I know. About 10 months ago you closed on a local pizza business in the area that you live. Walk me through how you went out to contact that person after you found them. I think it was on biz buy sell.
- [14:53]
Robert Kroek
Basically we found it on biz by sell and we just happened to be going to look at a commercial property of a multi unit, multifamily apartments in the area. So we did was we got the information from the store, we didn't tell the owners, we didn't tell the broker anything and we just went there and had pizza. So we walked in and immediately I knew this could be a great pizza store to own. And here's why. The weeds were a foot tall outside. When we went inside, there was no music. Literally no music. At 5:00 on a Friday when the place was pretty busy, they had no lights outside. It was just all of these things that were simple, simple things to do to add value to this business. And yet the place was packed. We had the dinner there, we ate the pizza. I think we had chicken wings, we had a beer, we did all that and I was like, wow, this area is growing. We drove around, there were cranes everywhere, hundreds of homes being built, and this is the key. So we did a Google search, the nearest pizza store to all of this development. And from this pizza store was 2.4 miles away. Now, for those of you that are new to the world of buying businesses, you might think, like. Like, that's really close, but it is not. When you're in an area that is growing and thousands of homes are being built over the next two, three, four, or five years, 2.4 miles away is a very long way to go when you're someone picking up a pizza to go home or for delivery. Territories and all of that. So after that night, we just felt that this place could be a home run, and we just wanted to move the next steps. So the next day, we literally contacted the broker. We said, hey, we want to take a look at this further. We didn't even allude to the fact that we stopped by. We're like, can you put us in contact? We want to meet with the owners and kind of go through the business, run through everything. We wanted to see the numbers. We wanted to see the kitchen, the operations, what's the labor cost, what's the food cost, and go through all of that. So then, yeah, after we met with the owners, we were ready to go start the negotiation period, and that was it. Moved on to the next part of buying the business.
- [16:57]
Austin Hankiewicz
Do you have any pieces of advice to share for people as it relates to working with brokers? I mean, it seems like brokers are kind of all over the place now when it comes to buying small businesses, assuming, you know, that's just kind of how it goes. What was your experience like working with a broker? And do you have any advice for people who this might be their very first time working with a small business broker?
- [17:16]
Robert Kroek
Yeah, that's a great question. And if you'd asked me this question 10 years ago, I would have probably said, I hate brokers. But now I just like the ease of getting experts in a room and figuring out if a deal makes sense. Because these operators and owners of the pizza store, they were Ukrainian, so they didn't have really good English. They didn't really know how to sell the business. They didn't really know what they were doing. And the broker did. He does a lot of commercial deals. And so I liked having him on board because even though he's taking a small piece for doing this, I don't feel that piece affects us in the long run. Because like everything else we do, Austin, when I'm investing, whether it's a pizza store, a stock, or a crypto, it's for two, three, four, five years down the road. So for me, that little broker fee does not bother me at all and it really makes the process just easier.
- [18:08]
Austin Hankiewicz
I love that. So let's now move on to sort of this fourth step, which is evaluating the deal. Right. We've realized what our buy box is. We know what we have that unique specific knowledge in and what makes it exciting for us. We learned how to find these businesses, we found the one we want. We now know how to contact them. We're maybe using a broker. Now we're finally able to sit down and evaluate this deal. I think the first and foremost kind of most important piece of information as it relates to evaluating any deal stock investment, anything you want to evaluate is you need to make sure you have correct information. Right. And so in this instance, that means getting the financials of the business, all profit loss statements and everything directly from their machines and not from some third party accountant. Right. Knowing that you have the right information. Information. Now, assuming you have all the accurate information you need to look at the last, let's call it 12 to 24 months of sales, gross profit, operating income and after tax profits. So what does all that mean? Sales is exactly what it sounds like. That's the revenue, that is how many pizzas Robert is able to sell every single month. Right. Gross profit, that is. Now, after we take into the cost of what goes into making a pizza, the marinara sauce, the pepperoni, the cheese, the dough, what is our gross profit margin on that specific product that selling operating income. Now you sprinkle on top the rent of the store, right? Do you pay a lease? I mean, how are you owning this, this actual property? And now is the employee costs are included, you have a bunch of other sort of operating the business costs that come with, you know, operating a business. And once you deduct out all of those things, that's the operating income, that to me personally is the most important number. And then the last number is the after tax profits. It's the operating income minus the taxes that you are taxed on because. Thank you, Uncle Sam. So as you evaluate this information, it's important to know and notice that your sales are trending higher over time, your gross profit is very stable. And maybe you can now compare this gross profit to industry averages or maybe some of even your competitors, if you can get some insider information. How has your operating income changed over time? Have you hired more employees? Are they less employees now? Is the rent going up? Right. How is that changing? And then finally, who's now getting paid from these after tax profits? Are you paying yourself before the profits, after the after tax profits? There's A couple things to think about there. So evaluating a deal, a lot goes into it. A lot more than just number goes up, right? Are we making money? Are we not? And that's what's so important and interesting about this Wall Street Journal article that came out. They said one of the biggest things they're doing as they evaluate and run these businesses is they hire real accountants to come in and scrutinize every penny and make sure that the bottom line is the bottom line. They said in the WA Journal article, and I quote, the moment we realize we're now paying more for a screw or a hammer or something else that now gets passed down to the customer. And so you have to have that mentality as a small business owner when you're scrutinizing these deals and evaluating them, how much has inflation impacted this business and is that accurately being portrayed in their operating income? Are the profits truly trending in the right direction or are they skimping elsewhere where they might not have been skimping before? Robert, walk me through kind of other things that these people can do now as they realize, you know, you mentioned the non tangibles of evaluating a business like the music or the weeds and the night. You know, all those things. Walk our listeners through why those things. The intangibles are just as important when it comes to moving the needle from an after tax profits perspective as is looking backwards with the financials.
- [21:43]
Robert Kroek
Yeah, that is a great statement and so important for everyone listening and watching to understand. Because when you think about, let's say the restaurant or many businesses, oftentimes you have to really look at and consider what, what you can do something about. Usually your rent is fixed, so you just need to make sure that the rental amount is proportional to the sales of the business so it fits within where it should be. For instance, in a restaurant you want rent to be 5 to 7% of gross sales. That is the number. If you're running the numbers in the beginning and rent is 12 or 14%, you're probably going to go out of business. So understanding those numbers and being able to decode them is so important. But you're absolutely right. When you're looking at the other things, the intangibles, the things that you can add value and boost sales without being able to worry about the other aspects of the business as much, that's where the key to success is. When I look at a business day one like the pizza store and I saw there was no lighting outside, no music, you know, the outside had weeds a foot tall. I knew that by those things, just those simple things being changed, cleaning it up, updating the marketing, they didn't do any anything with Instagram or TikTok or really Facebook. And when I looked at the numbers, they had only spent $400 in marketing for the entire prior year of 2022. And the general rule of thumb, if you're going to own a restaurant business or many franchise type small businesses, you want to spend 2 to 3% of sales on marketing alone. And a lot of business owners just don't do that. So what I look at first and foremost is I look at all of what Austin alluded to, but then I look at what are the value adds that we can do immediately to improve this business's bottom line and top line. And those are really just normally staring you in the face because when you walk in and have the eye that I do of a business, you know what you can do immediately that will likely end up in higher sales, which then will turn into higher profits. But also when I see their system, do they lack inventory control systems, do they do anything with email or text marketing, do they do any kind of ad strategies on Facebook or Nextdoor? All of these things are very affordable, yet can move the needle drastically by making those changes. So I think that's probably the biggest part for me when I look at any business is what can I do for the least amount of money to provide value and increase sales and therefore the bottom line.
- [24:17]
Austin Hankiewicz
I love that. Now as we move on to the final sort of portion of this episode which is negotiating the price and executing on the handoff, I want you to specifically talk about your experience with this pizza shop acquisition. But more specifically as it relates to the price you paid for it as a multiple of owners equity. Right, Owners pay. So that when you do plan to exit this business in the next 18 to 24 months. Right. How did you know to price it? How did you know where the multiples were supposed to line up at? And what pieces of advice would you give other people? People who are trying to figure out a fair price to pay for a small business?
- [24:53]
Robert Kroek
Yeah, I love this question. Always understand who the seller is, what's their situation, are they motivated? So I look at it that when I look at these numbers I want to get it for a good multiple of owners discretionary income. So in this instance the book work all claimed that the owners were making about $85,000 a year for this business. So if you were to look at it to keep simple numbers, that would mean at a 3x multiple, this business is worth around $250,000. But they were only asking $199,000 for the business. So we took that number and after realizing the situation that we were in, we offered them and asked them if they were willing to do owner financing, because that always makes my life easier, quicker, because I knew that they had to close very quickly. And so we ended up negotiating the price down to 149,000 from 199,000 and then able to get $100,000 of owner financing on the deal at a 6% interest rate. And so I felt 6% was fair to them because they're going to make money on their money. And it was cheaper than what I could go get the money for if I were to bring in additional partners to buy the whole thing. So what we did is we raised a smaller amount of capital to be able to buy the business, renovate the business, have some cash reserves, get in, get up and running. And we were able to do everything and be up and running in two weeks, which was pretty amazing. But it doesn't necessarily mean that has to be the way you do it. There are a lot of great programs out there with SBA loans and other types of loans you can get to buy small businesses. I just have a more unique situation because we buy a lot of small businesses and therefore we have a lot of investor parties that are interested in getting involved with these small businesses. But always remember when you're negotiating to try and get what you can and negotiate the best deal for yourself, because you never know what's on the other side of the table and where you can put yourself. Because like Austin alluded to, let's say we paid, we'll round the numbers off, we paid 150,000. Once we get to that year, year and a half, two years, and we're really rolling, we've got it all figured out. We're making really good money. The goal then is to be able to sell it for a 3 or 4x multiplier. And in a small town like that, that is a very reasonable multiple to expect. So if we sell it for a 3x multiple of $450,000, that puts me and the investors and everyone in a great position to be able to have some write offs along the way, get some distributions along the way, but also have that big come up at the very end. So that is what I love about it, because we're going to get this thing really dialed in, in really making money, and then be able to then sell it to someone else that wants to run it forever.
- [27:41]
Austin Hankiewicz
So you mentioned owner's financing. Explain. Specifically in this scenario of $100,000 at 6%. So what you're saying is instead of going to a bank and borrowing $100,000 of cash, you're going to say, I will pay you, the old owner, a portion of profits plus 6% interest up to back on that hundred thousand dollars. Walk through what that means, means.
- [28:02]
Robert Kroek
So it doesn't necessarily mean a portion of profits. You're just agreeing and having a separate contract from the sale price and saying, okay, you're willing to finance part of this, in this instance, 6% for four years. So let's call it $2,000 a month. I don't know the math off the top of my head. But then you're agreeing to give that. So not only are they getting their hundred thousand, but they're getting the additional 6%. And it worked out well for them because they didn't need the money as much as they needed to be out of the business and have it sold because they were leaving the. But you'd be shocked, especially talking about these baby boomers of how many of them are already rich, so they just want out of the business so they don't have to physically lock the doors and just close it. So they are very willing and able to do owner financing. And then it's just a matter of coming to the terms with them, having a lawyer draft that agreement. It's a very simple agreement. And then that's it. You make a monthly payment to them just like you would the bank, and you're up and running.
- [29:01]
Austin Hankiewicz
Got it. That's really cool. I mean, so it seems like if you bought it for that 150. So you simply said, hey, here's 50,000 cash right now for the business. I promise to pay you. I think it comes out to like that. Just over $2,000 a month for the next 48 months, plus that 6%, $100,000. And that's a, you know, contract you guys have rocking and rolling. They're now able to leave, say, hey, I'm done. I got my 50 grand and I get paid 2000amonth. Now Robert's in charge of the business, and so they now have no expectations of the profits that you're now generating. Right. So you're generating these profits. You get to those profits, you pay your employees out of them, their investors, things like that. And as those profits go from that, call it 80, 90,000 a year to 100, 120, 150 over time as you continue to scale, then you say, hey, I'm listing it now on Biz Buy sell myself. We want 450,000 for the business. And at a 3x multiple of $150,000 a year, that's how that would work. And so you would go from $50,000 out of pocket in the beginning to now a $450,000 exit. Right. So essentially you 9x your money over this, call it 3 1/2 to 5 year time horizon of owning a business where you're not getting a 9x cash on cash return like that in the stock market, maybe in real estate somehow if you're lucky, you can figure it out. But this maybe back to what Robert and I were saying earlier, the way that some people are able to build wealth if they're willing to have that American grit, right? They want to get their hands dirty, they want to work hard, they want to work on the weekends and really build up a pizza shop in this example into a really thriving, profitable business that you could put a thr3 or even 4x multiple on for the next purchaser to run it and do that for their life. So what an awesome episode. I love being able to dig into all the details like this, Robert. I think it's really helpful for our listeners.
- [30:43]
Robert Kroek
Yeah, and it's just so cool because you think about, you alluded to the roll up strategy earlier on in the episode and that's what a lot of these private equity firms are doing. They're going around the country and they're finding people that own these H Vac, these laundromats, these restaurants, all of these mom and pop shops shops and they can, you know, buy these businesses for a million dollars or less or on up to $20 million, buy a bunch of them, control a region of the market in that sector and really, really do well. But also when you look at a restaurant like this, if we get that 3 or 4x multiple on this restaurant, since we're talking about the restaurant, it's really great for not only myself but the investors because you know, you're not always going to make a ton of money along the way way. But that exit is where all of the big returns come from. And that's what I like about it because none of these small businesses are easy. So I don't want anyone to get it sideways that they think it's super simple and it's all rainbows and unicorns. But at the end of the day, if you can add value and you can stabilize a business and make it profitable consistently. Somebody is going to want to buy it because they're going to want to pay for the cash flow, they're going to want the write off or or they just want to have something for the family to run that is fun. Maybe they're going into retirement. Maybe they sold their business and they want something that's a little smaller and easier to run. There are a lot of people out there looking to buy small businesses and that's why I want to keep doing this every day for the rest of my career.
- [32:08]
Austin Hankiewicz
Sounds like a blast. Let's do it. And if you learned something in this episode, be sure to share it with a friend. Send this episode to the friend you want to buy a small business with. How about that? I love all right. Now before we jump into the question and answer part of the episode, we need to take a moment to hear from this episode Sponsor Monarch Money Speaking from personal experience, I know exactly how stressful and time consuming managing your finances can be. Between building a budget and keeping tabs on your expenses across different credit cards, no wonder people are too afraid to start budgeting.
- [32:38]
Robert Kroek
Yes, Monarch Money makes it simple and easy to connect the dots across all of your spending habits. No matter how many different financial institutions you might use, Monarch Money tracks where your money is and where where it's going all in one simple to understand dashboard. From Net Worth tracking to budgeting, Monarch Money makes it simple.
- [32:57]
Austin Hankiewicz
Monarch Money is also customer focused. They push new updates to their app every few weeks and they actually have a very active Reddit community. R Monarch Money customers often submit product suggestions, vote on new features, and can easily view their company's roadmap ahead.
- [33:11]
Robert Kroek
After checking out Monarch Money for myself, I now understand why it is a top rated personal finance app. Right now. Listeners of the Rich Habits podcast will get an extended 30 day free trial when you go to monarch.com habits. That's M O N a r C H M o n e y.com h a b I t s for your extended 30 day free trial.
- [33:37]
Austin Hankiewicz
And don't just take my word for it, Robert. My girlfriend, she loves Monarch Money. We check it out, we've used it before. It's actually really cool. This isn't just like a little paid for ad. I mean it's a really cool platform guys. So if you want to get control of your money, you want to sit down, know where it is, know where it's going, Net worth tracker, all this stuff. I mean this is a really, really cool plat platform. It is very cool And I'm not just saying that it's pretty cool, so go check it out. And Robert, speaking of cool platforms, we actually haven't done a portfolio update on our $20,000 investment that we made. I want to say now back mid June into the platform frec f r e c.com if you guys are unaware, freck.com is this really cool platform that allows you to direct index the S&P 500, the NASDAQ and other indices that are on the stock market and are readily available and should be inside of your portfol. What Robert and I did is we said, okay, why do we want a direct index? Because we want the tax loss harvesting efforts for us automatically done by Frac. So if we can go in and put $20,000 into the S&P 500, which we know goes up and to the right over a long period of time by 8, 10, 12% per year, it's up 20 something percent this year, Robert. And if we can tax loss harvest against the volatility that comes with the stock market, we'll not only be making money in the stock market, but also offsetting our taxes when it comes April next year. So I'll log into our account and share with you guys the progress that we've made. All right, Robert. So our $20,000 that we invested into freck.com's and P500 direct indexing platform here is up 12.5% when you include the $861 of tax loss harvesting that we've done since June 6th of this year. Compare that now to the only 7% the S&P500 is up, which means we have outperformed by doing absolutely nothing. Right. It's all done automatically behind the scenes for us, 5% against the S&P 500 by just riding the wave. It's really cool of a platform and we really, really like it.
- [35:40]
Robert Kroek
But that's also, I think, one of the strongest points of what we do with the Rich Habits podcast and the Rich Habits Network. You talk about it all the time of having this active management of your money. And I think it's really important for people to understand understand that's how we're always uncovering these cool strategies like Freck and some of the others that we do to be able to make more with our money than the benchmarks. You hear me talk about it all the time. You need to make your money work as hard for you as you work to get it. And that's one of the reasons we love frec, because it feels like free money.
- [36:13]
Austin Hankiewicz
If you have the S&P 500 in your bridge account or somewhere else in your portfolio and you are not using FREC to automatically tax loss harvest against that investment, you definitely should check it out again. Robert and I, our balance here is $21,600. So we're up that seven and a half percent from a price perspective. But we've now also tax loss harvested 861, bringing our total return to 12 and a half percent, which is really exciting. Go check out freck.com we are big, big, big proponents of having sort of this free money, but also direct indexing automatically. All right, Robert, our first question when it comes to our Q and A portion of the episode comes from Julia. Julia says, hi, my name is Julia and I'm a recent fan of the show and I have a question for your Q and A. I'm 37 years old with $100,000 in my job's 401k, $19,000 in a pension, and about $2,000 between my Roth account and my bridge account. I've been too strapped for cash to max out my Roth. I know, I know. Shame on me. But I'm about to quit my job and I'm exploring my options with my 401k. I'm not sure if I should convert all of my 401 funds to a Roth IRA or if I should just roll my 401 into a traditional IRA. I could do this with Schwab or any other brokerage account. I'm going to go work for my mom's business, and I can't exactly roll over the 401k from my job right now to my mom's business 401k. So what do you think my best option is for someone at my age? Remember, guys, if I do convert this into a Roth, I will have to pay taxes on that conversion. What do you guys think I should do in this situation? Robert, what do you think?
- [37:52]
Robert Kroek
Oh, I feel like you and I are going to be on opposite sides of the fence on this one. So I'm not sure because I think we both agree that she said strapped for cash, so that's usually a bad sign. So I really hate to say you have to roll it over into the Roth right now because then she's going to have a big tax bill. So it's a little bit tricky because part of me wants to say let it ride till she gets in a better situation. A few years down the road road, then cover the tax man. But then Also, part of me says it might not be a bad idea to take tax hit now and get rolling with the Roth IRA and just let that money go and then build up the other accounts later. So I don't know. I think it could go either way and I'd love to hear your take on it.
- [38:35]
Austin Hankiewicz
It could go either way. I agree. She's at that age where it's like, like if she was saying, hey, I make 180,000 a year, I'm maxing out my Roth, I'm doing all these cool things, I've got 20,000 in a high yield savings account, then I'd say, yeah, do the conversion and save $20,000 effective 20% tax rate right, on that extra money, right. That you're realizing as taxable income with this 100,000. So go save 20,000 for that tax bill, pay the tax bill and keep all 100,000 invested. However, again, to your point, Julia said she's strapped for cash. And so I don't know if that is a thing that she can actually do. So, Julia, if I were you, I would roll the 401k into a traditional IR IRA. I would keep all 100,000 of it in sort of this IRA mentality, not the Roth, do not convert it. Make sure it's invested though, correctly. S&P 500 vti, voo, vgt, moat, right? These good index funds we know and love and perform well over time. And then I would also make sure that you start maxing out that Roth IRA like it is your job. Right? If you want tax free money in retirement, which is how we want everyone to retire higher, you need to put yourself in a situation to have that. And the only way you're going to have that is by maxing out the Roth. You've done a great job of getting this hundred thousand in your 401k37. That's a pretty good age to have that kind of money. But now it's time to really buckle down, make the honest budget. There's a link in our show notes below to download our budgeting template. And you need to find $589 a month in your budget or $7,000 a year to max out that Roth IR IRA. Giving yourself the best chance to retire with tax free money.
- [40:14]
Robert Kroek
I love it. I think it's like you said it, it could go either way. And I think we covered all bases, so I hope that helps.
- [40:19]
Austin Hankiewicz
Our next question comes from Joey. Hey, Austin. And Robert. First, I just want to say I love your podcast. I listen to it Every morning on the way to work. Now I'm 27 years old and I make $65,000 a year. I currently live at home in New Jersey. I have $16,000 in a traditional savings account, $22,000 invested into my retirement accounts on Acorns, 13,000 DOL Public's high yield cash account for my emergency fund, $1,000 in a couple ETFs like Voo and QQQ, $3,000 on Robinhood for some stocks, and even 7,000 invested into crypto. And I just started contributing to my 401k at work and there's about a thousand dollars inside of that. Now here's my question. I'm looking to buy my first house in the next six to 12 months and I'm looking at house hacking like you guys talk about with a duplex. I know that there's the Fannie Mae loan out there, but I don't know how to go about buying a house for the very first time. Can you guys help me out a little bit? I always appreciate your guidance, Robert. I'll kick this one off. So Joey one, don't buy a house. You're not ready. But we'll talk about that in a second. How to go about buying a house. Let's just assume you are wanting to move forward with this for whatever reason. So let's make sure you do it responsibly if you listen to us about it or not. I bought my first house in 2019 and it was the scariest process ever. I had absolutely no idea what to do. I was trying to figure out how to get quality qualified for a loan. I was trying to figure out, you know, what that monthly payment would begin to look like. I was trying to figure out inspections and interest rates and mortgages and all these other different things. Hoas and God, it was just so annoying. So the first thing I would very much encourage you to do is understand how much house you can afford. Without knowing how much house you can afford, there's no reason to even begin looking the easiest way. And Robert and I talk about this all the time to figure out what you can afford forward when it comes to purchasing power of a house is your monthly mortgage payment does not make up more than 35% of your take home pay. Now you want a house hack, which means that theoretically speaking, half of your mortgage should be paid for by the tenant that you'll be living with. So assuming that that is the case, the mortgage payment that's left over that you're still responsible for should not take up more than 35% of your monthly take home pay. You said that you're now making 65,000 a year, which means you're probably taking home 3,500 dol to $4,200 a month. Even at $4,200 a month, that monthly mortgage payment that you're responsible for should not at all be over 1500 bucks or you will be house poor, my friend. There is not much you can get right now with a monthly mortgage of less than $1,500. Which brings me to the second point, which is it's probably not a good idea for you to buy a house right now. And I want Robert to explain that.
- [42:57]
Robert Kroek
Yeah, I look at it this way. We always talk about building your base to $100,000. And Joey, at this point you have around 55,000. I'm not saying I'm glad you have it and you're following a lot of what we talk about, but I just think you're early. I'd really like to see you build that up further and be prepared. Because even if you found a home that fits within your budget, you're going to have the down payment, you're going to have furniture, you're going to have closing costs, you're going to have commissions, and then all of a sudden your 55k is down to 20k and you ate away 30,000 or $25,000 of your money, then you're almost starting back at zero. So I would rather see you keep renting, keep your expenses as low as possible, get that 100k base built so then that way you're in a better position and then try to find that duplex, triplex or fourplex because you also could, if you're really, really hell bent on owning a property now, you could look at an FHA loan. Whereas if you get that duplex you only have to put 3% down rather than 10 or 20% down. So just keep those items in mind. I would rather see you wait a while. But if you're going to do it, look at the FHA, look at the Fannie Mae 5% down mortgage or look at a DSCR loan. Look that up. It's a debt service coverage ratio loan where you could maybe buy that first duplex using that type of loan. But just understand what your options are and don't be house broke and use all the money you've worked so hard to save to get into that house. Because remember, remember your money is dead money. Even if you have equity in that home until you sell it. And so just keep that in mind. We don't want to see you cash poor and house broke at the same time.
- [44:37]
Austin Hankiewicz
Yeah, I'm looking at some duplexes here in New Jersey, Robert, and there are some in, they'll call it 350, $450,000 range. There's this really nice one here that just hit the market a couple days ago. It's like a Victorian style home. It's actually really cool for 450,000. And so when you think about, you know, borrowing, you put 5% down on this. So let's call it 450,000 times zero. You're looking at putting down, first off, $23,000 as a down payment. Newsflash, Joey, that is now even more than you have invested in your retirement accounts, first off. So that's a lot. And now you're borrowing $420,000. And so at its surface, this is a $2,700 a month payment. But now you also have to think about insurance and taxes and maybe even HOA fees. So now you're talking about 3,000, maybe $3,400 a month, depending on how much that turns into. So you just got to run the numbers, man. I really agree with Robert here. Build your base. Before you think about this, it's a great idea. We want you to be house hacking. It's a wonderful idea, Joey, but give yourself about 18 to 24 months to really aggressively invest your money. You're living at home, your expenses are very low. Get that base built, get $100,000 into your investment accounts across everything, and build up that emergency fund. You've only got 3,000. I want to say that. Closer to 15,000.
- [45:50]
Robert Kroek
Yeah. And I think just for everyone watching and listening, listening, don't be in a hurry to buy a primary home. I promise you you will thank me later. Five, ten years down the road, get your base built. Then if you want a house hack for a year or two, maybe house hack twice, it's just going to set you up so much better because having these duplexes, triplexes or fourplexes are going to really help you cash flow and have some write offs and depreciation. It's really a good way to go. So I appreciate where your head's at here, but I think you need a little bit more of the basic case built first.
- [46:23]
Austin Hankiewicz
Our final question comes from Andre. Andre says, hey guys, I got a question for your podcast. I'm 35 years old, married, and I'm the primary breadwinner in the house. We have no kids but we are thinking about it. I'm self employed and make anywhere between 350 to $475,000 a year. My wife is a private tutor but also subs at the school to fill in her free time. She brings home around 20 to 25,000. We live in Nashville and we own a house. We have a lot of money invested across a ton of different accounts. However, I have $450,000 sitting in IND funds with Edward Jones. They mentioned during a meeting that I could move this money into what they call an SMA account. He knows I like to tax loss harvest and I personally don't mind taking risk. I've never heard of this account before and I have actually no idea what goes into it. Can you guys break it down and explain if it's a good idea or not? So really a question, Andre. So an SMA account stands for a separately managed account. You can think about this very simple, simply as going to someone and saying, hey, I have $450,000. I want to be risky with it. I want to invest in international stocks. I want to invest in real like have a strategy, an objective, right? I want to have X kind of risk tolerance. I want it to grow by X amount. I want to have whatever that sort of underlying investment strategy is for you and they go do it. It is separately managed from your retirement accounts. It is separately managed from your, you know, 529 and the kids call like all these other different things. It's a separately managed account account whose sole purpose is to execute upon the objective and investment strategy that you shared with your advisor. Now I do that myself except I'm the one managing it essentially. I have a bunch of single stocks. I've got my dividend growth stocks. I've got some high octane unprofitable technology companies. I've got some big tech names, right. I self manage my money in a separately managed account out of my own retirement. So Andre, if you want to put this money in a separately managed account sort of inside of Edward Jones, be my guest. Guest. However, there are some pitfalls. The first one being the high fees to have someone sit down and actually want to manage this money for you, they're probably going to want 1%. Now in my opinion, I'm not going to pay someone nearly $5,000 a year to just buy a couple ETFs in single stocks for me. I'm just going to do that myself inside of public.com. but if you don't feel comfortable doing that and you do feel okay with paying $5,000 a year, about 1% to have someone manage this, that's totally cool too. And the second thing is just be aware of what you're getting yourself into into when it comes to liquidity, when it comes to time horizons, when it comes to the risk that comes with some of this stuff. I guess I'm just saying, Andre is like, if your advisor says, hey, we want to put you in this because we think there's going to be great stuff in the Chinese stock market, right? Well, we just saw that. Yeah, we had a crazy boom in the Chinese stock market, but now it fell 50% from that recent high. So there's just a lot of risk that comes with getting out of the general index funds that Robert and I talk about. And unless you are well educated as to what this money is being invested into, you need to just kind of cool it, be a little bit more careful, and if you do want to take on that risk, do it from a educated perspective.
- [49:34]
Robert Kroek
Yeah, I don't like it. I'm going to be honest. There's more administrative fees, there's more processing fees, there's less diversification. There's just a lot of restrictions that come with an SMA account. For me, I would rather see you just have a nice basket of index funds or if you're going to pay those kind of fees, go work with a licensed fiduciary that is a wealth manager. You would qualify for being under that 1% threshold in most cases. And you would then get active management throughout everything, not just this one account. So then if you had that fiduciary, they would help you with retirement strategies, tax strategies and everything else. That's why I don't like the sma. I feel like it's a fancy way of getting people to sock away their money in these limited offerings and just pay more fees. Because it almost reminds me of kind of that set it and forget it strategy of like a target date fund. So I personally don't like it and I wouldn't recommend doing it.
- [50:33]
Austin Hankiewicz
Robert, that's a great point. Now, before we round things off with our farewell, just want to remind everyone that we have the Rich Habits Network. Robert, can you believe that we, so far inside of the Rich Habits Network have deployed over a quarter million dollars into pre IPO and startup companies since its inception only six weeks ago? I mean, we invested into SpaceX, we invested into Weave, we just invested into this awesome company called Fluid Stack with nearly half a billion dollars in contracted revenue. I mean, Robert we are just taking all the fun deals that come to our desk on a weekly and monthly basis and sharing it with people who want to participate. At the end of the day, it's very important, in my humble opinion, to be taking some of these shots, even if it's only a 1,000, $2,000 small check investment into some of these companies. Because we all know companies are staying private for longer, allowing the private investors who got in before the IPO to realize some potential major gains. So if you want to join the Rich Habits Network and participate, invest alongside of us. There's going to be a link in the show notes below.
- [51:40]
Robert Kroek
Yeah, I love it because everyone asks how do we do it? They all want to see behind the curtain. And so with us creating the Rich Habits Network and allowing people to participate along with us, opening up our deal flow, opening up everything so people can see how it works in the big leagues, I think it's just awesome. And so many people. It just reminds me 30 years ago when I was coming up and I was really making a lot of money and just getting started, there was no networks, there were no school communities, there was no way to collaborate with other like minded people to grow your wealth. And that's why I get so much pleasure out of what we do with the Rich Habits Network and the community. Because opening up our deal flow, I think is so important because I know when I was a little guy I couldn't get in on these kind of deals and you know, I just love what we're doing with all of this deal flow. It's so important.
- [52:30]
Austin Hankiewicz
So if you're new around here, don't forget to hit the follow button or the subscribe button. If you're watching on YouTube and share this episode with a friend, send it to the person that you think it'd be fun to buy a business with. And with that being said, thanks everyone and have a great start to your week. So you've bought tons of businesses in the past. There's a ton of different ways to find businesses, but how are some of your favorites?
- [52:49]
Robert Kroek
Yeah, that's a great question. And to go back to number one real quick.