philip-arthursOur guest today is Philip Arthurs from The Business Miner. Philip is an expert at buying businesses that cash flow. He led our conversation about how you effectively buy a business.

We talked about two ways of buying a business. One we agreed that was a good thing and one he and I agreed to disagree. When you listen to the episode you'll hear exactly what we mean.

In today's episode you'll learn some of these things:

  • How to find a great business to buy.
  • Why buying a business can be a better option than starting a business from scratch.
  • Why evaluating and understanding the cash flow from the business is crucial.
  • Some easy ways to protect yourself when buying a business.
Transcript: 

Narrator:         Welcome to Cracking the Cash Flow Code where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.

In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh Patrick:   Hey, how are you today? This is Josh Patrick and you're at Cracking the Cash Flow Code.

My guest today is Philip Arthurs. And Philip has a company, The Business Miner. And he has done lots of businesses. He's an investor, an entrepreneur, a CPA, and an evangelist for acquisition which is what we're going to talk about today because we're going to have a very lively conversation, where he's going to try to convince me that acquisitions actually are a good thing to do. The reason I'm against it is I've done a bunch of acquisitions, very few have actually worked well for me. Most of ‘em were gigantic failures. And the research shows that about 75% to 80% of acquisitions are non‑accretive which means they don't make money for the acquirer.

So, let's bring Philip on.

Hey, Philip. How are you today?

Philip:              Hey. I'm doing well, Josh. Thank you for having me on your show.

Josh:                My pleasure.

So, Philip, you're a fan of acquisitions. I am not. I am a fan of organic growth, by the way, I thought you should know.

So, why do acquisitions make sense, first of all?

Philip:              Well, when you're doing a startup business, there's a lot of work that goes into that. And you have to build out your systems and your processes. You have to hire people. You may have to fire people. Then, you're having to go out and be the salesperson. You happen to be everybody. And you're missing a very important piece which is one of the top reasons businesses fail is that cash flow. If you don't manage your cash flow well, you're likely not going to stay in business, right? It causes a cash flow issue because you're trying to work in all different areas of your business as well as, you know, trying to go out and find new business, so.

Josh:                Yeah, starting from scratch, it’s really, really hard. So, I'm assuming, when you're talking about acquisitions, you're talking about how to get yourself into business not how to grow your business?

Philip:              I am talking mostly about how to get yourself into business. Now, you know, if I’d give you some background, what led me to here, maybe that’ll explain it.

Josh:                Sure.

Philip:              You know, I'm a CPA by trade and worked for some of the top CPA firms in the country. Did consulting work. Did turnaround work. We would turn around failing businesses. And then, I did some transaction advisory work. My largest client at the time hired me on as their CFO and we helped grow the company's revenue 240%, also increased their EBITDA - the cash flow of the business, by 500%. And this was all in less than five years.

So, a big part of our strategy there was acquisition. Now, that wasn't the only strategy but that was a big strategy. We actually first sold off a bunch of stuff. And then, we started buying. We sold off stuff that that was not producing well. And then, we started buying. And we got some economies of scale there just from buying the businesses that fit our company well.

So, I would say, I like it as a pro strategy. And I also like it as a start your first entrepreneurial experience as buying a business. I caution some people on that. You know, you have to have some sort of experience in that industry or management experience. So, you know, there are some challenges, some hurdles, for people to get there but, once you've met those first few hurdles, it puts you on the fast track towards business success and money.

Josh:                I would probably agree that, if you were going to start from scratch and you can buy a business, you can buy it at the right price which is a really big deal. I see most folks, who buy their first business, dramatically overpay for it. And because of the way the deal is structured, it’s typically, you know, 50% - 60% down. And then, owner financing for that 30%, or 40%, or 50%.

You know, if you're buying your first business, you're likely not buying a multimillion‑dollar business although you could, but you're probably buying a business that does under a million dollars. The challenge comes, if you're paying too much money for this, it’s more of a challenge for the seller than the buyer because buyers tend to stop paying sellers when their business doesn't perform as well as it should and they paid too much money for it. Maybe you ever run across that problem?

Philip:              I've not run into it personally. I've heard but, you know, I've never personally run into that. But I think that's part of the reason why I would want there to be some sort of seller financing involved at some level, to keep the seller with some skin in the game so they're not, you know, hooking you to a sinking ship.

Josh:                Yeah, that’s what I tell sellers all the time. You know, I do a fair amount of consulting with people who want to sell their business and I say, “Your goal is to hold no paper because the truth is often buyers stop paying you for tons of reasons.” And, frankly, if I sell my business, I've lost all control over it. I mean, if you buy my business and screw it up, and 30% of your business goes away because you didn't know what you were doing, why should I be the one of the bears the penalty for that?

Philip:              Yeah. I totally understand that argument but, you know, you're representing a seller, I'm representing a buyer. I'm going to tell them, “You're going to want some level of owner financing in that arrangement” because I do think there are a lot of people, the sellers, they over exaggerate their numbers or maybe they fudge some things and are dishonest. I mean, some owners are downright dishonest. And it’s big purchase, right? Especially, if you use SBA financing, now, you're talking about having your house on the line which could happen in conventional as well but, you know, a lot of people who are just getting into this, they want to use SBA financing to try to get in at 10% of the value, out of pocket, and then the rest with SBA and seller financing.

Yeah, I just-- I would feel better, personally - me, having some sort of-- you know, even if it's just 10% - 20%, just so that they have some skin in the game still. And if they're unwilling to do that, I almost look at that as a sign that maybe they don't believe in the business that much.

Josh:                Well, you might look it at that way. You might look at it, which is the way I look at it, which is you're going to buy the business. You would have total control over the business. I have no control. And why am I taking a risk that you're going to do a good job with the business you're buying from me?

That was sort of the attitude when I sold my food service vending company. We got 98% of our sale in cash. And the reason was it’s like a due diligence. It’s for you to figure out what might not be right there. You guys have been stalking me now for years.

Philip:              Yeah.

Josh:                If you don't know my business, now, I am not about to play this game. If you want to give me control over the business, after you buy it, then we can talk about that. But you're not going to want to do that. And, frankly, I'm not especially interested in backing up your stupid decisions.

Philip:              There's also tax advantages for the seller, too, to spread out their payments over a longer period of time. So, there's an advantage to them at that [inaudible 00:07:46].

Josh:                Yes. And, I mean, the tax advantages are there. But, I mean, I'm going to pay, you know, 15% or 20% in capital gains. Whether I do it in one year or 10 years, it's still going to be 15% or 20%. I just pay a bigger number, but I also get a bigger check at the end of the day.

And if you're around the M&A world a lot, investment bankers will also say, “The only money you can count on, in a business sale, is the cash you get at closing.”

Philip:              I agree.

Josh:                Everything else after that is, “Well, okay, maybe I'll get it but--” I used to write a blog for the New York Times and I wrote a bunch of articles for The Times about people who sold their businesses and never got paid.

I've even seen things where people sold their business, ended up having to take money out of their pocket because they allowed themselves to stay on as corporate officers. And the buyer screwed up the business so badly, they got in trouble with the regulators. And the ex‑owner, who was the seller, had to pay the fines to the state.

Philip:              Wow.

So, I want to help people become qualified buyers.

Josh:                Okay, good.

Philip:              That's the whole part of what I'm trying to do here is help people understand, How do you be a good buyer? What can you do to prepare? You know, certain people probably don't need to be buying a business right now. And if somebody comes to me and says, “Hey, I want to look and buy this business.” I'm going to ask him a few questions. And I might say, “You know, I think you need to wait a little while.” Right? If they have no management experience, I will say,Well, stay in your job. Ask your boss, what does it take to be in a management position,” and work for that, and have experience managing people. And learn how to read a financial statement. Little things like that, that are important.

And I'm also going to say, “Well, do you have the stomach to fire somebody? If you had to fire somebody, could you stomach that?”

Josh:                Yes.

Philip:              Do you have the stomach to not pay yourself when payroll’s due? You know, you’ve got to pay your people before you pay yourself? So, there are some hard decisions that have to be made as an entrepreneur.

Josh:                So, if I come to you and I say, “Philip, help me figure out what I need to do to buy this business.” What are the top three to five things you're going to tell me I need to do?

Philip:              Well, first of all, I'm going to ask, “Well, what do you want your life to look like? How involved do you want to be in the business?” Somebody that comes and says, “Well, I don't want to be involved at all” I think, is a huge red flag. But outside of that, understand how to read a financial statement, a cash flow statement.

Josh:                Cash flow statement is absolutely key. And I will tell you that I don't think there's more than 2% of business owners in the country that could read a cash flow statement.

Philip:              I would even say that there are accountants, at CPA, firms that don't know how to read a cash flow statement.

Josh:                That's a sad thing.

Philip:              It is a sad thing. But, coming from the CPA world, you're taught how to put them together. I just built it. I don't understand what it's telling me. There's a lot of accountants that are not business minded.

And also, learning what a 13‑week cash flow is. That's a tool that we use in the turnaround business. You're basically trying to project out what your expenses are 13 weeks in advance, knowing what kind of revenue you need to bring in to meet that demand and be able to pay your debt service and sticking to that. So, it's kind of like a forecast budget, in a way, but it's just a tool to manage your cash flow.

There's a lot of different things I would explain but, yeah, top three - get experience managing people, know how to read a cash flow statement and a financial statement, and then also just know what it is you want in life.

This is an easy example. My wife and I are in the real estate business. And we actually both are realtors. We flip houses and sell our own stuff. Working with clients, if you don't want to work on the weekends, and at nights, and on holidays, and while you're on a dinner date with your wife, don't be a realtor. You know, if they say, “I want to go to this. And this is what I want my life to look like.” Well, you need to [inaudible 00:11:26].

Josh:                Yep, yep.

So, that's buying a business from-- for your first-- you know, I don't own a business to buying a business. I think the folks listening this podcast might be more interested is I want to do an acquisition. I already have a business.

Philip:              Right.

Josh:                And when you’re advising people there, what kind of advice would you give them about how to make sure their acquisition doesn't fail on ‘em?

Philip:              Well, due diligence is key. Asking lots of questions.

Josh:                Okay, but what sort of questions and what should I be drilling down on?

Philip:              Well, prove out their revenue. You can do an easy thing called a proof of cash. So, basically, you're taking deposits. And then, you're subtracting out and adding beginning/ending AR and some other little things. It gets a little more complicated than that but, from a high level, you can get an accountant to help you with this as well. But you come up with proving out what's the actual revenue, nonetheless.

Josh:                Yep.

Philip:              I actually look at balance sheet accounts, particularly assets, you know, because assets are a debit in the accounting world. And so are expenses. Sometimes people will take those debits to expenses and shove them into an asset.

I saw at one point where somebody had shoved a million dollars’ worth of expenses into-- I guess, it was a construction‑in‑process, work‑in‑process‑type account. So, what they've done, basically, is they've shoved all these expenses that weren't supposed to be in that construction‑in‑process account, and they weren't depreciating that either because construction‑in‑progress and work‑in‑progress, those are not appreciated accounts. So they’re puffing up their financial statements doing that.

You know, asking lots of questions and getting an attorney involved to look at-- to see if there are any liens on the business, any kind of legal issues the company's dealing with because they could very well be your legal issue, once you get involved. You want to make sure that there's some synergy. It’s like buying this business is going to add value because of whatever reason.

I was in the ready‑mix concrete business. That was a fun business. Yeah, we had ready‑mix plants. We had concrete block plants, sand quarry, lumber mill, but we went out and bought more concrete block plants. And we went out and bought more ready‑mix plants. Part of our strategy though, on that, was these were on the edges of our market. And we didn't want another competitor, certain competitors to come in and buy them out, so we wanted to get in there and get ‘em, so we could secure our market a little better. So that was one of the strategic reasons why we decided to do that.

And when you have more businesses, if done the right way, and your business has good margins in it that can support you. If done the right way, you get a lot of economies of scale because you have certain fixed costs that don't end up going up just because you add on new plants, right? So, our bottom line, our EBITDA, is a percentage of revenue, was going up.

Now, we also were very insane about numbers.

Josh:                That's the basis for a strategic buy is if I'm a strategic acquirer, that means I'm coming to buy your business and I can make a bunch of your overhead disappear because I already have that stuff in place.

The thing I found which is true in acquisitions, where I think most businesses fail, is that most businesses focus on exactly what you've been talking about and they ignore the culture compatibility between the two companies. And that's where I see almost all acquisitions fail, is I'm buying your business and we have a belief system about how businesses should run over here. The acquired business has a different set of belief systems. Unless I have a strategy in place, before I buy the business, on how to get that culture to become my culture really fast, there's a good chance I'm going to spend way too much time - and I mean years, fighting between the two cultures, to get one or another to take over for it. And it's the main reason that you get these zombie businesses out there.

This is especially true in the private equity world. They'll buy a business. And they're going to come in and think that the selling owner, who they're retaining, at least for a period of time, is going to become able to take instructions from them.

And I'll tell you one thing about selling owners, they're not good employees and they’re bad employees.

Philip:              That's right.

Josh:                They’re lousy employees.

Philip:              So, unless you have a methodology--

And Cisco Systems, I think, did this better than anybody. They would come in, Cisco‑ize your business in 24 hours. Anybody who could not, or would not, or they thought would not be a part of their business, they were gone the first day. There was no-- [inaudible 00:16:17] we're going to try to make you change. They said, “No. That doesn't work. This is how it works.” And they've done 300 or 400 acquisitions, most of them had been very successful.

Philip:              Absolutely. And I think that point is very well received. And it's a good point.

We had a strategy around that. And when we bought a plant, we spent a lot of time there. We'd have people from other plants go to that plant and get them indoctrinated, if you will, quickly. There was no fuss. I mean, if you didn't get on board, we have somebody else that's looking for a good job.

We paid well, too. So, we did a really good job at paying. We did a lot of good bonuses and incentives. And we were able to do that by looking at our numbers.

We had KPIs that would refresh instantly. Like every five minutes, the data would update. And we're looking at GPS. Now, our GPS tracking systems would tell us how long a driver was on the job after he finished pouring. The sensors would know how long it was taking him to pour off the concrete. And we would mix that with the timekeeping data and all kinds of stuff.

We could tell you how profitable a single driver-- out of 300 drivers, I could tell you how profitable each driver was.

Josh:                Yeah, you guys were really unusual then. Even big companies don't do a good job with that.

Philip:              We did an excellent job. That was one of my strengths. I'm actually a data guy. I nerd out on it because I'm a big Power BI guy.

Josh:                That's kind of a good thing. That was one of the reasons your acquisitions work. The other thing is, I bet you guys didn't overpay.

Philip:              No. We wouldn't overpay. Sometimes there's a strategy for overpaying a little bit, especially if you're trying to keep a big competitor out of your market. But you don't want to do that. And you definitely want to make sure that margins are there because, I tell you, going up on price on somebody is a tough thing.

When we took that business over, somewhere around five years ago, they hadn't been increasing their revenues. So, that's a big deal. You've got to increase your revenues. You’ve got to look at your cost every year. If you give your people raises, well, then you've got to raise your rates so you can offset that and keep your margin the same. And it would be unreasonable for a customer to argue with that.

Josh:                Yeah, I agree.

The thing I see a lot is that, in almost every industry, there's what I call the bottom scum feeder M&A person who wants to represent both sides of the deal, puts a bunch of buyer finance in there, overvalues the business because they're getting their fee on what the price was that was negotiated and not the price that actually gets paid. And these deals completely fall apart.

In the wealth management world, there’s two people that do that and, in my opinion, is unethical. And you either represent one side or the other, but not both. And you can't get paid by both parties because who are you working for at that time?

Philip:              Absolutely.

And a big major change that I would like to make in this industry is to have more of a sharing arrangement where, like in real estate, you have a buying agent and a selling agent. I think the brokers need to have agency agreements. And they need to share the fee. So, you have somebody that's got a vested interest in each side because I know, sometimes, you know, selling brokers - not all of ‘em, but some of ‘em, they could just be feeding you a bunch of BS. Their responsibility is to their seller and not to the buyer. But the buyer is made to believe, “Oh, this guy's got my best interest at heart.” They may not.

Josh:                The buyer should have representation also.

Philip:              Yeah.

Josh:                Buyer brokers play a big deal, in my opinion. For someone who's never bought a business.

Philip:              Yeah. And you need a team. You need a CPA. You need an attorney. You need an advisor. And then, also, a big piece of your team, which a lot of people don't think of, is either your spouse or your significant other. That's a big deal. And if you don't have a spouse or a significant other, it could be your best friend that knows you really well who’s not the kind of person who’s going to try to squash your dreams. But, yeah, having a good team is crucial.

So, I would never suggest anybody just go out there and try to buy a business on their own. You need a team. And that's part of what we're doing. We're introducing people to experts in the M&A world, who understand the stuff, and give ‘em some scenarios, and stories, and things that are going to help them along.

Josh:                Cool.

Hey, Philip, unfortunately, we are out of time.

Philip:              I was enjoying it.

Josh:                I'm going to bet there's going to be some folks who are going to want to find you and find out more about what you do and all that kind of good stuff. So how do they go about doing that?

Philip:              Absolutely. So, they can visit me at www.thebusinessminer.com/cashflowcode. And, for your audience, they'll be able to go out there and download a template, an LOI template, and also be able to schedule a call with me. So, if you want a free consultation, 30 minutes, free, for a limited time, just go out there and take advantage of that.

Josh:                Cool. That sounds like a good idea.

And I have two things I would like you to do. The first I ask, after every podcast, which is please, please, please, please, please, please, please, please, please go to wherever you're listening to this podcast and give us an honest rating and review. If you love the show, tell us. If you hate the show, say that also but just give us a review, please.

And the second is I developed this thing, I don't know, probably close to 20 years ago. And I sort of did it as a joke because a friend of mine who was in the estate planning business came out the periodic table of estate planning elements. And I said, “Well, gee, business owners have like, you know, a zillion tactics and strategies that they can do to make their business more sustainable,” that’s economically sustainable and personally sustainable. So, I put together my own periodic table of business elements. And to get it, it's really easy, you just go to www.stage2planning.com/periodic. That's www.stage2planning.com/periodic.

This is Josh Patrick. We're with Philip Arthurs. You're at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.

 

Narrator:         You've been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around 100 years from now?”

If you've liked what you've heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at jpatrick@stage2solution.com.

Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

Topics: Sustainable Business, mergers and acquisition, buying a business

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