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Podcast (10k-podcast): Play in new window | Download (Duration: 38:56 — 35.6MB)
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On this podcast, Walker Deibel of Quiet Light Brokerage will be talking about startups and the business buying process.
“Buy then Build”
Part of the business buying process is “Buy then Build” has been adopted by two universities as a required textbook
But Walker spends 40 hours a week at Quiet Light Brokerage
And there’s a reason why he wants to help “acquisition entrepreneurs”.
Walker Background
Walker is the author of Buy then Build – how acquisition entrepreneurs outsmart the startup game and a business broker at Quiet Light Brokerage
Was an SEC-registered, stockbroker
Also M & A person – familiar with private middle markets
Also works as a business broker
⁃ Has bought ½ dozen companies himself – only one was a straight-up e-commerce
Also done a couple of startups and had a couple of exits himself
⁃ Had a fulfillment center
⁃ Now works for Quiet Light Brokerage
The other is “buy than build” which is also a book
What brought you to Quiet Light Brokerage?
Pre 2010 the first company he bought was a book printing company.
He was charged with the mission of getting a brick and mortar entity online
They called it “print is dead”.
Walker had some strategic business issues to address and grow through acquisition.
Searching for a business to acquire
Looked at 100s of companies from lists and 27 in real life
Quiet Light has a team made up of entrepreneurs that have done this means they make a better prospectus.
In the end, Walker was given a chance to sell him a brokerage.
Walker ended up buying a company from QLB and it came up organically.
He just asked Mark.
Prospectus
Most entrepreneurs don’t even think about buying business until they’ve sold.
Then 60-90
“Gosh that startup period is so hard, I’d rather buy and cashflow immediately”
Zero to One startup
– Peter Thiel – creating a whole new marketplace.
That is a true venture capital market
Most people are trying to do an N+1 thing – you’re not creating a whole new market.
What is the purpose of a startup?
But most people are aiming for creativity, autonomy, financial independence.
Part of the business buying process is to give away stock in your company for equity
aim: “build infrastructure such that the output of the infrastructure is bigger than the cost”
The startup phase is defined by not having a bigger output
Only 4% of companies in the USA ever exceed $1M
(“Scaling up” Verne Harnish)
SBA lends up to 90% of the transaction value of businesses.
Downpayment close to that of a home in America
The minute you can stop focussing on cash flow, you can start focussing on how you Moneyball
There is an analysis on SABRE metrics – batters who get on base, rather than home runs, they cost less money and they can win at baseball.
The Red Sox adopted this.
IF you acquire a business generating $1M in annual revenue, you’re already
It’s somewhat affordable, it’s a margin of safety,
Lower multiples than the middle-market so cheaper.
Startup success rates vs SBA acquisition
People put in capital, sweat, 2 years trying to get it off the ground.
90% of them fail – they go to ZERO!
Businesses that have been acquired using loans from the SBA – 3 years
⁃ Default rate has been as 2%
So if you define Entrepreneurship
Despite the necessity and importance of entrepreneurship, it’s still a crude and error-prone process
Investment perspective
Pretend you’re going to buy a business with
Metrics
$1.4M in revenue
$200K in earnings
Buy for 3X profit
SBA loan plus 10% down payment
So invest $94,120
Future
You’ll hold it for 10 years
Grow at 10% a year
Then at the end $3.9M rev,
$600K earnings
Sell for $2.5M
After interest etc. discretionary earnings are $5M approx. including exit cash
27X ROI on the 94K
“We’re going to 10X this sucker”
Entrepreneurs in a startup often say this. But you just 27x your capital.
What is an “Acquisition Entrepreneur”
Also came out of Harvard Business School same time as Walker
Is this low risk?
Not really.
There is a quantifiable and qualitative risk.
100% of super-wealthy people own business
40% professional CPAs, Lawyers, etc
60% more entrepreneur
If you’re an entrepreneur, you’re living the most engaging way. Your company is an extension of you.
If you went into SBA backed acquisitions, every one of the people has a personal guarantee on the business.
If it’s a startup, no personal guarantee.
Whereas if you buy a business with a loan on it, you’re in the frame.
This is not trading cards!
This is hard.
But it has
⁃ Product-market fit, sustainable revenue,
⁃ It’s just as hard
You still have to make just as many decisions
- Should I get a salary?
- Do I need to invest in a new product?
- Should I grow through acquisition?
With a startup
You have to create something from nothing. Only successful entrepreneurs get there.
Whereas when you’re operating a going concern, it changes.
And the skillset is different.
Entrepreneurs are good at starting from scratch?
A lot of times, buyers want to know why the seller is selling.
One of the main reasons is that entrepreneurs are building from scratch and creating value.
Example: $1M revenue business with a 10% profit margin so 100K in earnings
Say you sold the business for 300K
Now maybe take 100K and buy a new business.
Why buy one?
- Equity build-up (by paying debt down)
- ROI
Because of the equity build-up and ROI, it gets a similar value to what the entrepreneur bought as well.
“If you’re good at starting, then keep starting.”
Most entrepreneurs do that once, maybe twice; then they start buying buildings.
Just like Jeff Bezos who built Amazon but bought Wholefoods.
The acquisition can be an accelerator
Walker bought a business as an add-on
⁃ Grew revenue 20% in a day
⁃ Cashflow
