A (12:02)
Yeah, and me too. And that's when I said I'm working on big things and broken things. That's my new assignment in order to grow the business to where we are. You know, it's just a matter where do you want to end up 10 years from now and what's going to take you there. And apparently this is taking you to where you're running the business rather than working in the business. And that's a good step for you. But I think you've got to identify where it is you want to go and what you've got to do to get to where you want to go. And if you want to be a guy swinging a hammer 25 years from now, then you're going to step back in. But if you don't, then you're going to have to continue this path. It's the only way to not do it is to build a team to put yourself in that situation. So, yeah, I guess it's a normal pull. Particularly someone that takes, like, craftsman's pride in their work and that's a normal pull. And, you know, me being on the microphone, deciding to put a Ramsey personality on the microphone, they gotta bring it. I gotta be proud of what they're doing. They gotta have high quality, but I still gotta step out of the way. Owning a business can Be a heavy load. You want to serve your customers well, make a healthy profit and grow. And your team, family, and customers are all counting on you. And now everybody's talking about AI like it's magic and you're wondering how to keep up. You're carrying a lot, but you don't have to do it alone. That's where NetSuite comes in. Over 43,000 businesses, including Ramsey Solutions, use NetSuite to lighten the load by bringing all their numbers into one system. Accounting, inventory, CRM, payroll, the works. And now NetSuite's AI takes it further. Automating busy work, flagging inventory issues, spotting cash flow problems in real time, and catching risks before they hit. So you're not just closing the books faster. You're making decisions confidently. And when your numbers are right, that takes a lot of pressure off your shoulders. And yeah, switching systems is a big move. But netsuite still success process gets you up and running fast. Go to netsuite.comramsey for a free product tour and to schedule a time with a NetSuite rep. That's NetSuite.com Ramsey one of the things that comes up around an Entree leadership event, if I'm at Entree Leadership Summit or Master Series, and oftentimes comes up with the call on the show here as well, is this idea of buying a business. Should I buy a business? Well, I met a guy the other day who had a huge, huge operation, and he had done all of his growth by acquisition, meaning he went around the country buying up people that did what he did and put them all together and then created this conglomerate, this huge operation, and it was all by purchases. Ramsay has grown with virtually no purchases completely organically. So I have not used that strategy to grow. So my tendency is most of the time when I'm talking to a small business person, unless you're already in a business, working there, and they say, all right, I want you to buy it from us. That's different. But if you're walking around on the street with an idea and I want to be in XYZ business, let's just say I want to be in the heating and air business. I'll just make up something. Okay. My personal opinion is you'll actually end up, in most cases better off to just get a truck and some tools and start and, you know, just make some money, hire some people, buy another truck, make some money, hire some people, buy another truck, start hiring some office staff and create some processes, learn how to run a business and grow the business. Organically, from the ground up. That is what we've done. And honestly, a lot of times when you buy a small business, you're buying a basket of trouble. There's a lot of stuff going on, but there are instances where it does make sense to buy a business. But I think sometimes what people are doing is thinking that buying an existing business is a shortcut to success. Sometimes it is, sometimes it's a shortcut to a nightmare. So you really want to know what you're getting into if you're going to buy. So first rule, if you're going to buy a business either just from the outside or you're working there, I want you to do due diligence. And that means you really have to get the fine toothed comb out and comb every tangle out of this thing. I want to look at the tax returns, I want to look at the books, I want to talk to the sales team, I want to interview customers. I really want to know every stinking detail about this business. No surprises. I really want to get under the hood and spend as much time on that as I can. When we're buying a piece of income producing real estate, say an office building or an apartment complex or a warehouse or something, we put the property under contract and then we go through their books for due diligence. We look at every lease, we look at every piece of paper, we look at the streams of income, we pull the taxes for ourselves, the property taxes, we run our own quotes on, the insurance, we check the zoning and make sure it's zoned legally. We do and we look at everything. I bought a piece of property the other day and we even drilled it and had it checked for epa, see if there had been any kind of leakage of gas or anything on that property before because it was in a commercial area. And I was a little bit worried that there had been, you know, you can get into dadgum EPA mess. So due diligence, you really dig, dig, dig, dig, dig into the details on that last piece of property we bought. We took six months digging through the details before we took closed on it. So take your time and go deep on the due diligence. Most people are lazy about that cut short and the current owner doesn't want you to see all their junk under the hood. But don't buy it if you can't get under the hood. Don't buy it if you can't do due diligence. Now once you get to that point, you need to pay cash for a business. You don't need to be going $250,000 in debt to buy a sub shop, a pizza parlor, heat and air company. And you got this lien on your house and you got this anchor around your neck and you're trying to go swimming. So you save up and pay cash for whatever it is you're buying. Which again leads us back to starting it from the ground up, possibly because you don't have the money. But if you're sitting on that kind of cash, you say, I'm actually going to buy this business. I've done my due diligence. Then. There are three different methods to put a valuation on a business. One is a gross revenue multiplier. Now, a gross revenue multiplier would be in an industry where it's very standard That x times 10 times gross or 15 times gross or 5 times gross is the valuation. Because the operations of that industry that you're in are so standardized that when you've got that gross, it automatically means a Y amount of profit. X gross means Y profit. And so you don't have to think about if it's there or not. So, for instance, I've been in the broadcast world, and in the old days, a lot of radio stations were being gobbled up and bought by corporate. So an iheart or a Cumulus would come into the market and buy a radio station. And radio stations throughout my career have gone anywhere from 5 to 15 times cash flow. And they don't. So they're not looking at profit. They're just looking at the gross revenues minus a couple of items and basically what they call cash flow in that world. So that's a gross rent multiplier or gross multiplier, gross revenue multiplier. Very few small businesses actually sell on that. If you're in a franchise situation where there's 2,000 stores just like yours, they may have a standardized gross revenue multiplier and say it's just worth. That's what it's worth. But most small businesses, when you're purchasing them, I would not use that method. But it is there. That's one of the three methods. The second method is book value. And book value is if you close it and collect all the receivables and pay the payables, sell off the inventory and sell off the equipment. What is that pile of money? So the, you know, I was talking to a guy the other day, the equipment was worth $1 million or 1 1/2 million dollars. And so the book value on that business was at least one and a half million Dollars just because he had that much in equipment. And so because if you just bought it and sold the equipment, you'd have a million and a half. So if you bought it for more than that, you'd lose money on the transaction. If you bought it for less than that, you'd make money on the transaction. So in receivables, obviously that's the collectible receivables, that's companies that owe that business money. And then payables, you gotta pay the expenses and net it out. And so what cash do I have in the checking account after I pay my bills and receive all my outstanding invoices? And then I sell off the equipment and I sell off the inventory. What have I got? I was talking to some friends the other day that are winding down and they looked at selling their business and they figured out that their inventory and their locations were so valuable that they were more valuable if they just closed them. So they're setting up a two year going out of business strategy. And they've got several stores, so they're going to put some of them out of business the first year, some of them out of business the second year. And at the end of it they'll end up with a bunch of paid for real estate and have cashed out all the inventory and all the receivables and they'll go home with a pile of money. That's their strategy to get out. Because they can get more for the business on book value than any other way. By cashing out the inventory, cashing out the equipment and cashing out the cash, that's your book value. Now if you're buying a business for book value, you're really not buying anything as far as the business goes, you're just buying a bunch of stuff. Cause the business is not really making anything. The typical way that we value a small business is a multiplier, what's called a cap rate, capitalization rate on the net profit, the taxable income that the tax returns show on the business, not what they think they make, not all this nothing matters then but the net profit. Now if most small businesses will go from four to five times net profit. So if the little business is making $200,000, that means it's worth 800 to a million. If the net net profit after the manager has been paid to operate it, and you're an absentee investor, all expenses have been paid to operate the business. What is that net profit now? And so if the owner is not paying himself except out of profits and he's running it. Then you've got to take a manager's salary out of those net profits before you do the multiplier and again, four to five times that. So four times that means you want a 25% rate of return on your money. Well, that's a lot. Well, I can get 14 or 12 on mutual funds and small business is ultra high risk for me to buy a small business as an investor. And that's what you're looking at here. So I want a 25% rate of return on my money. That's four times. A 20% rate of return on your money is five times. So again, somewhere in there is the valuation. Well, we have a great name. Our brand is known in the city. We've been open 80 years. Doesn't matter. We have a great location. It doesn't matter. The only reason it's a great location or a great brand name or great brand recognition is if it creates profit. If it doesn't create profit, it's just a wish. It's just nostalgia. If you have a great location and you're not profitable, by definition, you don't have a great location. Hello. So that's just bullcrap, you know. Well, everybody knows our name. Great. How's that monetizing for you? I want to see profit as a result of that. Otherwise, you just have created a Sunday school class where you have a great name and don't make a profit. That's okay if you want to be a Sunday school teacher. It's not okay if you run the business and you want to sell it. You want to sell it, it better be profitable. 4 to 5 times net profit after all expenses, including a manager to operate the business if there's not one already being paid out of that P and L take that out of the profit before you run these numbers. So that's the proper way to value it and then pay cash. Now, you've also heard me where one gen 1 or gen 2's buying out gen 1 or where a key employee or two are getting together and they're buying out the boss or they're selling it to somebody else. Whatever. The only way I would ever consider, I personally wouldn't do this, but it's the only way I would consider not yelling at you for doing it is for you to set it up and say, okay, I'm gonna pay. This thing's making $200,000. We're gonna pay you 800,000 for it. And you know, I'm gonna take the manager's salary. So there's still 200,000. I'm gonna step in and be the manager and I'm making 200,000 profit beyond me having a living wage out of that manager's salary. So if you're already working there, you just keep your existing salary and it's coming out, but you still have a net profit of 200k, still have a sale price of say 800k. Then you say, I'm going to give you 90% or 80% of the net profits until we reach 800. Then if there's lower net profits because Covid hits, you're not bankrupted by this transaction because they get 90% of the net profits. So if net profits are 100 instead of 200, it's 90% of that. And if net profits are 500, it's 90% of that. And you pay the 800 off even faster. So hopefully it goes that way that your net profits are ever increasing. And so the amount going towards the 800 and when we get to 800, we're at full stop, you're paid and we're done. But you get a percentage of profits until we get to the number. Hopefully they're increasing profits. So we get there faster than the four year mark or the five year mark, depending on how we valued this thing. But that's how you can work through giving evaluation on a business. Otherwise you're just doing what we call asset purchases. And when you're just buying equipment and because the equipment is not producing more value in profits than the actual cost of the equipment, which means the business is failing, by the way. So if you've got a million dollars in equipment and the business is only worth 800,000, that means you've bought stuff that isn't producing a rate of return. There's no ROI on it. So this transaction sucked. So now you sell the equipment off. And that's a better deal than trying to sell the lack of profit that you have. But you don't get both. You get either book value or, or you get a multiple of profits or you get a multiple of gross reps, one of the three, you don't get to double up, go, oh well, we're gonna get this and this. Now the third, the last piece of this is a lot of small businesses have wrapped into them a real estate deal. Separate the real estate deal out, buy the business for what the business is, and then have the option of buying the real estate and rent the real estate back from the current owner. So we're going to, it's a restaurant and we own the building. Okay, we're going to buy the restaurant and rent the building, separate the real estate out with an option to buy the building later. We might want to move the restaurant out of the building. We might want to move the construction business out of this building. It may not be a good location after all or it might be fabulous and then you can buy it later. Once you've gotten the business itself paid off, then you can go do the real estate transaction with the option on it. But you don't have to wrap them together. As a matter of fact, it's not healthy mathematically to wrap them together. You can get yourself in a pinch and really get screwed up on where, where the value is in this deal. And I've had people say, well, I mean, I'm getting the real estate and the real estate's worth x. Well, you just did a real estate deal. You didn't do a business deal. You're not buying a business. You're buying dirt and mortar. So don't get confused about what you're working on here. Are you trying to buy what we call a going concern, a business that's profitable, that makes money? Are we trying to buy a piece of real estate? And if you get the two convoluted, you're going to screw up your numbers and your analysis on this and create a serious mess for you. So there's a little diatribe on buying a business, something to think about, a couple of things for you to put in your pipe and smoke. If you're working 60 hours a week and most of that time is spent putting out fires, you got a big problem. Your business is running you instead of the other way around. You're a fireman. That's why you need entree leadership, executive coaching. Our coaches help you uncover your blind spots, overcome what's holding you back and focus on the work that actually drives results. If you want that kind of clarity, go to entreleadership.com coaching and fill out the form to talk to our team or just click the link in the show notes. Guys, if you want to help us out, please consider following and subscribing, sharing the show, leaving us a nice five star review. Cut the link out, send it to somebody, say, hey, listen to this show. You're our best marketing. Tell people we're here, please, we need your help. Tell them we exist and you have been doing that. Thank you. Our numbers are way up on this show and we greatly, greatly appreciate you. Thank you for hanging out with us. Jake is In Mexico. Hi, Jake. How are you?
