Rich Habits Podcast Episode 87: How to Buy a Business (Step-by-Step) – Detailed Summary

Introduction

In Episode 87 of the Rich Habits Podcast, hosts Austin Hankiewicz and Robert Kroek delve into the intricacies of purchasing a cash-flowing small business. Released on October 21, 2024, this episode serves as a comprehensive guide for aspiring entrepreneurs looking to capitalize on the retiring baby boomer generation and the abundance of profitable small businesses available for acquisition.

The Massive Opportunity in Buying Small Businesses

Robert Kroek opens the discussion by highlighting the significant opportunity present in acquiring small businesses. With over 3 million baby boomers retiring each year, countless profitable ventures remain unsold due to inadequate succession planning. This creates a ripe market for entrepreneurs to step in and purchase these established businesses, thereby generating steady cash flow and building long-term wealth.

Five-Step Strategy to Buying a Business

The core of the episode revolves around a five-step strategy for successfully buying a small business:

1. Defining Your Buy Box ([03:40])

   • Robert Kroek emphasizes the importance of establishing a clear buy box, which includes determining the type of business that aligns with one's skills, passions, and financial capacity. He states, "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."

2. Finding the Deals ([06:03])

   • The hosts discuss various platforms where entrepreneurs can find businesses for sale, likening websites like LoopNet, BizBuySell, and crexi.com to a "Facebook marketplace for small businesses." Robert advises caution against scams and the necessity of providing credible information to access detailed business data.

3. Contacting the Sellers ([12:12])

   • Once a potential business is identified, reaching out to the seller is crucial. Robert recommends techniques like skip tracing to obtain contact information and stresses the importance of visiting the business in person to assess its viability. He warns against purchasing businesses sight unseen, sharing his experience with a poorly located convenience store as a cautionary tale.

4. Evaluating the Business ([18:07])

   • Austin Hankiewicz breaks down the financials essential for evaluation:

     • Sales: Total revenue generated.
     • Gross Profit: Revenue minus the cost of goods sold.
     • Operating Income: Gross profit minus operating expenses.
     • After-Tax Profits: Operating income minus taxes.

     Robert adds that beyond numbers, assessing intangibles like location, customer base, and potential for value addition is vital. He notes, "What can I do for the least amount of money to provide value and increase sales and therefore the bottom line."

5. Negotiating and Closing the Deal ([24:17])

   • Negotiation tactics are crucial for securing a favorable purchase price. Robert shares his experience acquiring a local pizza business, detailing how they negotiated the price down by leveraging the seller's motivation to exit the business. He explains the concept of owner financing, where a portion of the purchase price is financed by the seller, reducing upfront costs and facilitating a smoother transaction.

Real-Life Acquisition Example: Pizza Business

A significant portion of the episode is dedicated to Robert Kroek's acquisition of a local pizza business, illustrating the practical application of the five-step strategy:

• Initial Assessment ([14:53]): Visiting the pizza shop revealed neglected maintenance but strong customer turnout due to an upcoming residential development.
• Negotiation ([24:52]): The business was initially priced at $199,000, but through negotiation and understanding the seller's urgency, they secured it for $149,000, with $100,000 financed by the owner at 6% interest.

Robert elaborates, "Once we get 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."

Advice on Working with Brokers ([16:56])

The hosts discuss the role of small business brokers in the acquisition process. Initially skeptical, Robert now appreciates brokers for their expertise in facilitating deals, especially when dealing with sellers who may lack the skills to market their businesses effectively. He advises, "Having a broker on board makes the process just easier."

Notable Quotes

• Robert Kroek ([03:40]): "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."
• Austin Hankiewicz ([07:00]): "Being able to identify the types of businesses that align well with your own skill sets, your own experiences, your own unique knowledge and specific knowledge, rather, is the best way to go about this."
• Robert Kroek ([10:00]): "Trust me, you don't want to buy a business sight unseen."
• Austin Hankiewicz ([24:17]): "Understanding those numbers and being able to decode them is so important."
• Robert Kroek ([24:52]): "Always remember when you're negotiating to try and get what you can and negotiate the best deal for yourself."

Q&A Segment

Post the main content, Austin and Robert engage in a Q&A session, addressing listeners' questions on various financial and investment topics. Topics include 401k rollovers, first-time home buying, and investment strategies. Their responses emphasize cautious financial planning, leveraging tax-advantaged accounts, and the importance of building a solid financial foundation before embarking on major investments.

Conclusion

Episode 87 of the Rich Habits Podcast offers a thorough roadmap for aspiring entrepreneurs interested in purchasing small businesses. By outlining a clear five-step strategy, sharing personal acquisition experiences, and providing expert advice on working with brokers, Austin Hankiewicz and Robert Kroek equip listeners with the knowledge needed to navigate the complexities of business acquisition successfully.

Listeners are encouraged to apply these insights to seize the opportunities presented by retiring business owners and to build sustainable, wealth-generating enterprises.