The Best Practices for Buying or Selling a Small Business with Karl Barnham

Starting a new business is the traditional path to entrepreneurship, but prospective entrepreneurs shouldn’t discount the option of purchasing an existing business. On this week’s episode of The Playbook, host Mark Collier, business consultant for the UGA Small Business Development Center, is joined by Karl Barnham, President of Transworld Business Advisors. Today, Karl shares his wealth of knowledge and what it takes to find, value, and purchase a business.

Transcription:

Mark Collier:
Welcome into The Playbook Karl.

Karl Barnham:
Thank you for having me on the show today.

Mark Collier:
All right. As I said on my lead-in, I get a lot of clients that come in, they’re all starting a business, but purchasing a business is a great option man. Give me some reasons why?

Karl Barnham:
Absolutely. First of all, being your own boss is what most people have as a dream for them. It’s really important for them to look at the different ways that most people have been successful in doing that. First of all, many people think of Facebook and that starting it from scratch. But acquiring a business you wouldn’t believe is the most likely way that people will actually explore becoming an entrepreneur. Buy a business it has cash flow day one, so you don’t have to worry about the startup, establish business model, establish customers. The best of all you could focus on executing, growing the business. When you bring in that innovative insight, is how you execute the business versus trying to prove out a new business idea.

Mark Collier:
No, that makes perfect sense and also probably financing. Financing a startup is tough, but an existing business with existing revenue going that gives the bank a little bit more of a higher comfort level.

Karl Barnham:
You highlighted something really important. When you start up a business you need a lot of capital, equity people that can fund it. That’s why you always hear about venture capitalists and so on. But if you acquire a business, there are many vehicles to fund that. Not only family and friends may be even invested or your own saving, there are things like the SBA which provides loan, SBA 7(a) loans to help you acquire an existing business. Makes it much easier for you to get into being your own boss.

Mark Collier:
All right. What are most small business owners missing from their business plans? I know that’s important because you look at a lot of business plans I know.

Karl Barnham:
Absolutely. No matter whether you’re starting from scratch or acquiring a business, you need a business plan. First of all, a bank is going to want to see that if you’re going to go to them for funding, investors are going to want to see that. Most business plan have things like an executive summary, they have a marketing plan, they talk about the organization, the product and services they’re providing. But what I’m always surprised of is that they don’t have an exit plan as part of it. If you think about of investors when you go in, you see any of these show that show people pitching business, they talk about the idea and then they always say, well, what’s your exit plan? How are you going to exit the business? Having an exit plan whether you’re starting a business or a current business owner is absolutely important to understand how you’re going to be able to extract value in everything that you build.

Mark Collier:
No, you’re right. That’s part of the business life cycle. You go from inception to the exit and most people don’t think about that back end and that’s an oversight.

Karl Barnham:
Absolutely.

Mark Collier:
All right. What can a business owner do to best prepare themselves for successful sale or exit of the business that they own?

Karl Barnham:
Well, I’m going to highlight three things that are really important. First thing is you need a record of your business. If you think of buying, if you had a house, you would take an inspection of your house, understand what needs fixing and so on. For a business, it really comes down to your financials. Your books and records, making sure that they’re first accurate, that you are executing the business to show all the cash flow in the business, but really sitting down with a professional or taking the time yourself to learn how to get your books in order is really important.

Karl Barnham:
The second most important thing that you want to be able to do when you’re looking at creating a exit plan, is get a valuation. You can’t go to a buyer and say buy my business without having an idea of what it’s worth. There are many people resources out there to help you value your business. You could learn to do it your own, you can go online get some books. You could hire Transworld and other business professionals that specialize in valuating businesses, so you have an idea of where you are today and even where you want your business to get to as far as value what’s in the future so you can make a plan. The last piece that I would highlight is you need a good team in place and start focusing on getting your deal team in place. It may include an attorney, a CPA, but also a business coach or advisors to help you focus on how to make your business ideally perfect for a buyer.

Mark Collier:
Absolutely. You talked about valuing your business, and I know there are a couple of different methodologies that you can use to value a business. Can you briefly detail for me what one or a couple that you typically focus on?

Karl Barnham:
Absolutely. There’s over 10 different ways to value a business, depending on who’s doing the valuing. A bank may use one method an investor another method, depending on who it is. The first way is the asset method. They basically look at the books and record, what physical assets are in the business? So if you went onto your balance sheet on your financial statement, it would have under fixtures, furnitures, equipment, all the stuff that you’ve acquired in the business. There’s another component of that that’s intangible called intangible assets or goodwill, which is your customer list, your employees, the brand that you’ve built. People can do an assessment of value on that.

Karl Barnham:
The second most frequent way that people are using is a multiple of earnings. By multiple of earnings, excuse me, multiple of cash flow to be more precise, its different ways to determine how much cash is being generated from the business. You might have heard of the term of operating cash flow, you might have heard of seller discretionary earnings or SDE. You might have heard of EBITDA, earnings before interest, taxes, depreciation and amortization. All of these ways are ways to determine how much cash would a new owner get from the business to understand the value. Then it’s taken by a multiple of similar businesses in that industry, in that location. There’s various ways that we use to get those things at Transworld. We have not only our own private data for thousands of transactions, we also have private source data for private transactions to determine multiples.

Mark Collier:
So when you look at that aggregate data, do you come up with a median number? Is that how the evaluation is drilled down?

Karl Barnham:
It’d be amazing. 95 plus percent of small business, when I say small business I’m going to talk about businesses under two million dollars in sale value, so relatively small businesses there. They tend to be between two and three times the cash flow. What ends up at the lower end of that spectrum are businesses that are more operator owned businesses, where the business owner is in the business day to day performing many of the duties of the business. Those are going to tend to have a lower multiple because in effect a person may be buying a job, they’re replacing that person.

Karl Barnham:
The business that get on the higher side of that are typically businesses that the owners have put in enough systems into the business, built a really strong team including leaders within it, established marketing and sales that doesn’t depend just on them. Those businesses are beautiful and they have higher multiple because a competitor or another business can buy that. Because they’re one person if they’re running their primary business, they can acquire this business, have that leader and those systems in place continue to generate the cash flow and therefore it’s more valuable to them.

Mark Collier:
Yeah that makes perfect sense. All right so I’m an entrepreneur, I’ve started my business rolling along here a number of years go by. When is the optimal time to think about selling a business or is there an optimal time?

Karl Barnham:
There absolutely is. I’m going to say the simple answer immediately. If you’re starting the business, you should be thinking about your exit as we just discussed. If you’re running your business, you should start thinking about it. But at a minimum three to five years out before you’re planning on your exit, your retirement, doing something else is the ideal time. The reason for that most lenders will look at about three years of financials of the business. So you want to make sure that you’re showing the best three years of your business that you can when someone is looking at evaluating the business. But there’s also a macro element to it, you got to look at the business cycle.

Karl Barnham:
If it’s in an up economy, if you look at just over the past couple of years, the pandemic caused a lot of businesses to struggle. So imagine a buyer coming to look at your business and it’s just after you had a year that was really impacted by COVID, probably not the best time to sell your business. But what if you were on the other side of the coin and COVID helped your business and you showed a strong track record before and after of strong growth? Ideal time to sell your business because there’s a lot of people in the market right now to buy businesses and we got a lot of baby boomers that are retiring and they’ve got to exit.

Mark Collier:
Oh yeah, absolutely. So if they’re exiting you’ve got new folks coming into the fold, go over what are some of the pros and cons of being your own boss?

Karl Barnham:
Well, the first thing that most people, when I talk to entrepreneurs all the time is the flexibility. It allows flexibility of your time. There are three constraints that we often talk about. There’s a constraint on dollars, money, there’s a constraint on knowledge, and there’s a constraint on time. If you think about it money some people have a lot of it, some people have less of it. That’s something that can vary from person to person. Knowledge, people invest in getting degrees and knowledge and skills. That can vary from person to person, but time everyone only has 24 hours in a day.

Mark Collier:
They do.

Karl Barnham:
So it’s really important that people think about how to get their time back. As a business owner, being your own boss, you not only can generate an income like you could as an employee. Think of an employee as someone that is renting an apartment. Every day you’re renting your time to get an income. As a business owner, not only are you paying yourself, you’re renting to yourself so you’re getting that money, you’re also building an asset, a business asset that is an investment that could appreciate over time. Two benefits to owning a business versus being an employee.

Mark Collier:
That makes perfect sense man. So buzzword phrase out here nowadays entrepreneurship by acquisition, and it’s getting more and more popular. I’ve heard that’s the most proven pathway to financial independence and wealth creation, especially in minority communities. Talk a little bit more about that.

Karl Barnham:
Absolutely. There’s been a lot of conversation about building legacy, building wealth within all communities, but especially in the black and brown communities. Well, one of the things you got to think about, we’ve gone through a good 30, 40 year period of people graduating from great colleges, moving up in corporate America developing all these excellent business skills that allows them to manage businesses for other people, learn how to pivot, innovate. Now, think about it if at the same time the baby boomers are retiring. We’re in the middle of a 10 year period where people are retiring at accelerated rate.

Mark Collier:
They are.

Karl Barnham:
If you start thinking about it, when the financial crisis happened back in 2008, there were people that were 55, 60 that normally would’ve retired and exited their business sold it. But they couldn’t because of that economic impact. What did they do? They had to stick with the business, rebuild it back, which they did. Now they’re 10 years older now they’re 70, they eventually have to exit.

Mark Collier:
Yes they do.

Karl Barnham:
We’re calling that the silver tsunami. The many people that are going to retire and the business owners are going to have to transfer, but guess who’s sitting there waiting to take over those business? All these black and brown communities that have been building the skills. The trick is, is capital, do they have the capital to be able to do that?

Mark Collier:
Access to capital is the number one hurdle, no doubt.

Karl Barnham:
But a lot of folks have been successful both through retirement, saving through retirement. There are programs called like ROBS and others, what allows you to use a portion of your retirement fund to help support. There’s the SBA that’s there with loans that help people that have the right skills acquire businesses.

Mark Collier:
No, that makes perfect sense man. So what resources are available for small business owners and aspiring entrepreneurs that Transworld Business Advisors implements and deploys?

Karl Barnham:
Absolutely. First, we partner with organizations in every community that we’re in. Here in Metro Atlanta you have the SBDC of Georgia-

Mark Collier:
I’ve heard of those guys.

Karl Barnham:
Absolutely. They’re great resources. When someone comes to me and they’re thinking about starting a business, I say, “Get connected with a consultant from the SBDC, take some of their courses, understand what it takes to build a business.” The second set of resources that are available are start talking with lenders to make sure that you’re ready to take on a loan, understanding the process to be able to finance it. Building that relationship before you need to is really important. At Transworld, we help guide people go through education as well as some tools to help them on their journey. First of all, we have something called buyer match. This is a feature that allows you to go in there you can put little geographic locations and industries, types of business cash flows that you’re looking for, and it will automatically send you links to new businesses that fit your search criteria.

Mark Collier:
Interesting.

Karl Barnham:
So you start seeing and understanding some of the things that you’re doing. The second tool we have is for business owners that are thinking of moving out to other businesses, is getting a valuation. So we have a valuation tool on our website that allows you to go in there, you put in some information and it gives you a range of value. To get a more detailed valuation you can contact anyone on our team to help you through that.

Mark Collier:
Well, fantastic. So any last tips, tricks for aspiring entrepreneurs who want to enter entrepreneurship via acquisition? We’re going to scroll down your website address at the end of the show to make sure that business owners who want to reach you they can.

Karl Barnham:
Absolutely. Well, the thing I would say now is the time. If you think about it we’re coming to the end of the year and what do everyone do at the end of the year? New Year’s resolution. After this past two years of going through COVID and all these other things, if you’re thinking about the opportunities, the dreams that you have, it all starts with making a decision to move in that direction.

Mark Collier:
Absolutely.

Karl Barnham:
You could start talking with your financial advisors yourself. Take a personal assessment of your financials. Understand if you’re ready now, if you need to do some things to get ready, it might be saving money, it might be aligning up investors. Start doing that now. The next part is educate yourself on what it takes to acquiree a business. There are many resources you can go and look at our insight report, that helps you walk you through the process and tells you a little bit of what it’s like buying a business, and also start researching industries that you might want to get into.

Mark Collier:
Great. Karl Barnham, president Transworld Business Advisors want to thank you for taking the time to come in today. Entrepreneurship by acquisition is a growing trend and I would implore any business owner who’s thinking about acquiring business to reach out to an expert like you.

Karl Barnham:
Absolutely. Thank you Mark for having me on the show today and really appreciate this time.

Mark Collier:
Absolutely.

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