Business Broker John Rodriguez on What First-Time Buyers Get Wrong

Welcome back to another episode of Still Searching. Today, my guest is John Rodriguez. He is a managing broker at the Ventura Group, which is a small business brokerage firm based in Austin, Texas. John, how you doing? I'm doing good. Thanks for having me on. Thanks for being here, man. I'm excited about this, because especially from having a really good seasoned business broker, we're going to get a lot of solid nuggets about, for first-time buyers, about things they should be looking for, how to position themselves as a qualified buyer. And not just that, you've got a perspective as a business owner yourself, right? I do. So like a lot of business brokers, I came into this kind of sideways. I actually, I'll go all the way back. So I grew up in a small business that my dad started, ended up taking it over once he got into his 70s, decided to leave that group. And then like a lot of people, I think that go through exiting a small business, they want to buy a business. And when my family decided to move to the Austin area back in 2021, I gave myself 12

months, you know, to find a business and to find some place where I could leverage everything I'd learned, running my family's restaurant group and growing that without having to start from scratch. Wait, so you started running a restaurant? Yeah. The one business like alongside gas stations that were never supposed to buy? Yep. That was where I cut my teeth. So my dad immigrated to this country from Mexico in the early fifties and started working in restaurants. There's only work you could find. Eventually scraped up enough money, opened one, opened a bigger one, opened a bigger one. And that was what I grew up with. It was my dad, you know, the restaurant owner. And when I got into the group, we had, we had one huge location. And they had started doing some catering and events, retail foods. And I came in and just, I grew it into a group that had, you know, two concepts. We had several different revenue lines. And I decided that I really like being in business with family, like I think a lot of people, they get in business with family.

So I made the decision to leave back in 21. And that's where my family moved from St. Louis, where I grew up to the Austin area. And I really do think if you can, if you can figure out a way to make a nickel in the restaurant business, that is, that's a very good training for just about any business. Man, you're telling, you're saying it right too. Anything that can go wrong will go wrong in the restaurant business. I mean, those costs are ridiculous. It's like, if you, if you learn how to manage costs in a restaurant, man, you can, you'll kill it anywhere else. Yeah, it's, it is a thin margin, you know, difficult cashflow game. And our, so our flagship restaurant, the doors open at six in the morning every day for our prep crew and our maintenance crew. And then our night crew would leave at about midnight or one in the morning and we were open 362 days a year. So you want to talk about a demanding business. It's from a human capital perspective. Oh, it's on me. People ask me,

people ask me all the time, what's the hardest part of the restaurant business? And I go, imagine a business where a good year you make about $2,000 a profit per hire. Wow. Yeah. Yeah. Well, that it right there. That's exactly why I never want to own a business. But like you said, that's, that's exactly how you cut your teeth and figure out how to do it. So you said you got to an exit, right? I did. I did. So my, I came into the group in about 2010 and, you know, there was no real succession plan. My dad had a third grade education and, you know, all the lawyers and advisors he had, you know, they were just there to keep the IRS away, you know, the idea of like advanced planning and legacy planning. My dad just didn't, didn't understand that, didn't think about that. And when it came time for him to retire and he wanted me to get involved with the group, it was like, yeah, just go ahead, just go in there. They know you're an owner, like just go in there, kind of figure it out. And he'd been sort of semi-retired for about, I don't know, five or six years at that point.

And went in there, figured it out on the ground, you know, the, I think really the best way to figure out any business. And I was partnered with, you know, my father's business. Then I had my mother going half of it. And then I had my sister who was also working there. And we had never really, we'd never really talked about like, how do you take this one business as one owner and this founder, and how do you make it compatible with now having like all these multiple stakeholders that all have different expectations or contributing different things. And we just, we never really figured out a good way to professionalize the business, you know, to that point. And, you know, we all wanted different things from, we all had different expectations. And I thought, you know, in the interest of not fighting everything, skipping over business, I thought it was just better than I leave and just move on. That was back in '21 when I left the group. Okay, got it. Now, is your family still operating the restaurant?

Yeah. Yeah. Okay. All right. So you left the group and you're like, all right, well, I want to get back into business. I learned all the stuff about how to run one. I'm going to give myself 12 months to go find a business to buy, right? So what was your criteria and leave me through your search and let me know, did you actually buy something? So I didn't. So I had decided in about 2020 that I knew I was going to be exiting. We didn't know what it was going to look like, but I knew I needed to start thinking about like, what was next. So like most people, I thought the idea of buying a business made sense because I'd come into this business that was, you know, 35 years old at the point I got in there. And I thought that was the best way to kind of leverage, you know, what I learned and, you know, my experience. So I went on to Amazon and I saw Buy Then Build. And it's funny, I saw Buy Then Build and then I saw the author and I thought that can't be Walker Diabolus. I went to high school with Walker. Right, because you're from St. Louis. I'm from St. Louis. Yeah. He was a couple of years older than me. We were, I think,

only in school together for like one year, but I knew Walker a little bit and we were like friends in common. But I just, I started reading that book. I started, I found search funder online and I just, I started spending my spare time just trying to get, you know, acquainted with what that space looked like and what would be kind of a reasonable expectation given, you know, my experience and, you know, the resources I had. And then when my wife and I made the decision to move to Austin, I thought, okay, I'm going to get my broker packet together and I'm going to hit the ground running on August 1st and I'm going to give myself a year. And I did not appreciate how competitive it was out here in those 12 months. I really thought, because I tested the waters a little bit in St. Louis. I called a couple brokerages and I talked to some people and the minute I showed them an SBA prequel letter, I mean, they were sending me every listing they could. Yeah. So I kind of expected the same response when I got out here. I had my, I had my nice packet with my bio, my

investment thesis, you know, my PFS, brokerage statements, my prequel letters. And I thought, you know, I'm just going to go shop this around and sit by the phone. And I found out that at that time in Austin, it was just, it was really hard to be competitive as an SBA buyer, you know. I mean, you know, what debt service coverage ratios look like, you know, it's really hard to get. I was looking at kind of the four, 500,000 SDE range, really hard to get a loan to pencil out on businesses like that at more than like three and a half turns. That's really, it's about as high as you can push it. I mean, there's some, you know, kind of on the smaller side of the SBA range anyway, and you're like, Hey, if I duck down on the smaller side, you know, I'm not going to have to compete with these bigger like PD groups. What we find is there's still a lot of qualified cash buyers and people who have commercial loans is readily available. And you, yeah, you're right. You can't compete when your DSCR goes over that amount. I can't pay for the loan. No, I would, I mean, it happened over and over again. I'd see, well, for like every five businesses you see, you know,

four of them are just, they're really unsellable. But the one out of those five that looks really good, you know, I would talk to the brokers on them and they just go, look, if you can't come in at four, four and a half, like you're just not going to be competitive. And that's, that's what kept happening. And I, I decided to trade because I never planned on doing any kind of proprietary search. Again, I gave myself 12 months and doing proprietary search in 12 months is really hard. But I started, I started doing some of that just to supplement, you know, what I was seeing from the brokers in town. And I found that the, the hard thing with the proprietary search, at least from what I saw, is if somebody's, if somebody's going through a broker listing, they're at least like 75 to 80% of the way there in terms of what they expect, their decision to sell, they're planning their preparation, if it's a decent broker. When you're just door knocking, it takes a long time to get those owners from the idea of selling to actually showing you financials, you know, really getting

into the process. And I spent, I spent about six months doing that. So I had the brokerage search going on and then I was doing some outreach and I was finding that for just a second though, because like, you're exactly right over the proprietary part of it. I think a lot of searchers, they don't fully appreciate how difficult it is not just to identify businesses that could be in their buy box, but to actually have those conversations, because if a seller or if an owner of a business has reached out to a broker, they've at least gone taking the step of indicating their interest in selling, they've done a little, at least a minimum amount of work to kind of like, you know, pull their books together and get a little bit of information and like put themselves out there. But when you identify someone who hasn't done that, then not only are they not prepared to sell, but you have to like, you have to walk through the process. Are you interested? This is what it could look like. This is how we, you know, will you show me your books? I'll sign an NDA. That is a real thing. Like, you have to really warm them up to it all the time, wondering like, if you actually get to LOI, are they going to walk away from the deal and leave you with dead deal costs?

I mean, it's a, it's a whole different level. So like, yes, it is possible to find good deals for Priory. A lot of the best ones are, but it is a struggle. It is a struggle because you have to warm up the owner. You have to actually build that relationship. And you got to hope that not only they're committed to the idea of selling, but committed to selling at a reasonable multiple. Now I'm like, you know, 10 times. Yeah. And committed to selling to you. Cause that's Yeah. Something else, you know, I saw, I saw this on two different proprietary deals I had, where I took them from zero to, you know, about 75 or 80% of the way there where, you know, we were going through their books and we're talking about, you know, what a deal could look like. And I lost two of them because they went out and found another buyer, another buyer found them. And it's like, I invested all this work in educating them and helping them get prepared for the process. And then somebody came in and, you know, could offer a little bit more money or something. And now like, at the time that was really stung as a searcher, but now as a broker, you're like,

I'm so happy for those owners that they actually got themselves a competitive listing. Yeah. So the last one I found out about, this was an owner and she had told me, she was not going to let me see any financials until she had dinner with my wife and I, she was that kind of owner, which I, you know, I understood and I appreciated that. But this one came along very slowly and we were getting ready to go to California for the Superbowl. We were meeting some friends out there in the Rancho Mirage area. So the last meeting I had before we went to the airport was with this owner and I said, here's what the deal looks like. You know, I didn't do an LOI because I said, look, I just want, I want to talk you through this and I want you to be able to talk about it, you know, with your husband, with your other stakeholders. So I walked them through this whole thing and I said, as soon as I get back, I want to give you some time with this, we'll go through what an LOI looks like and some of the other things that we need to include. And she literally emailed me that when we were at the

airport coming home saying she'd signed paperwork with another buyer. And I said, please, I will, I'm going to be in Austin in like an hour and a half. I'll go straight to your place and, you know, she'd found someone else. And I don't even think that one was really about money. I don't know why she liked this other buyer so much more. I mean, I don't know, but I left town for two days and then, you know, there went about four months of work. Wow. Okay, so, man, you really struggled. It was 12 months going through the brokers, doing some proprietary outreach. You have a couple of near misses, but ultimately, you don't buy anything. So what happened? You get that 12 months and you decide, I can't keep searching? Well, what I, so I was new to Austin. I didn't have any network out here at all. So when I first got to Texas, I started going to a lot of networking events and I was talking to a lot of advisors, you know, hey, I'm looking to buy a business, you know, if you have any clients. So I started getting a lot of people reaching out to me going, hey, you know, I know this owner,

I have this friend, maybe you should talk to him, because what I would tell everybody is, I go, look, if you know anybody that owns a business that's even thinking about this, I would love to talk to them. Even if it doesn't make sense for me, they'll just benefit from having my perspective. And, you know, I ended up meeting with a lot of different owners and I kept seeing the same things just over and over again, that, you know, the businesses just weren't prepared. The owners didn't really understand how the marketplace worked. They had no idea, you know, what they should be doing for like advanced planning and sort of estate planning and tax planning. They were a lot like, you know, the way we ran our business. And after meeting with all these owners, I thought, you know, I think I'm going to start doing some consulting work and, you know, because I would meet with somebody and I would tell them, you know, some of the things from my perspective as a buyer and as an owner, and they would say, you know, I would love to keep meeting with you and I'd love to work with you. And, you know, I would come up with some kind of, you know, well, I'll charge you this for an hour or this. And I thought, you know, I should really, I should come up with something because if I can't buy a business, this is what I want to do. I

think there's a ton of opportunity for it. I think it leverages what I'm really good at very well. So that's how I started about six months into my search. I started thinking, well, if I can't get something over the finish line, you know, what, am I going to start something? Am I going to work somewhere? And that's when I just, I fell in love with the idea of like doing this kind of consulting work and just, you know, working with owners. And that's when I decided to get my SIPA designation. And that's when I started working on exit planning and advanced planning that's ultimately a led brokerage. I would imagine that those conversations with you and those other owners went across so much better than your typical M&A advisor because you had been an owner, you've grown up in a business. And so if these like owners are showing up and they're, like you said, they're unprepared, they don't understand the process, they don't understand the marketplace. You can completely relate to where they're at. They're like, by the way, I'm pretty sure this is what your business looks like. And they're like, yeah, yeah, that's exactly it. Yeah, I would go, look, it's just me

in your hair, like your attorney. Like, I believe there's, there's nothing you're going to show me that I haven't seen. Yeah, I mean, it gives me a completely different perspective. And I think, you know, the first one of the first conversations I have with any owner, you know, whether I was doing exit planning or like sort of growth consulting or advanced planning or whatever, is I would just ask him, you know, what do you want? And they would go, what do you mean? And I go, well, you started this thing, you spent half your life here. Like, what do you want it to do, you know, for your life outside of business? And I found out most owners have never been asked that and they've never really thought about it. You know, they, they decide to start a business for whatever reason, you know, freedom and build wealth legacy, whatever it is, necessity, necessity for a lot of them. Yeah, for my dad was necessity. And, you know, you take it from zero to a point where, you know, it's making good money and it's sort of, you know, stable as stable as owning a business can be. But they, it's almost like it's taboo to sort of think beyond that, you know,

and I found that there's just, there's not nearly enough owners and not nearly enough of their advisors that I think are talking to them about that. Like, hey, you know, you might be happy now and you might be really content now, but this is going to end somehow. And, you know, you can either control that or it can happen to you. And I've seen that the owners that do get really good results long term or the ones that are really proactive and they're, they're not just in there, you know, operating a business, you know, as their livelihood today, you know, they're really designing a business that's going to be able to fulfill all the things they want long term. Yeah, you're exactly right. And it's like, you know, we all know that, you know, at some point you will exit your business on your feet or on your back somehow. But you're right. I mean, so few people, and it's not just business owners, it's just people in general. We don't really decide, like, you know, where, what does winning look like to us? You know, when you're 60, 70, 80 years old, you look back and like, Hey, I would, this was, I designed the life I wanted. I'm successful. And then you work

backwards from that, you know, and so that, that is the pivotal first question, you know, like, if you, if you're ready to sell your business, you know, forget the business as an asset. They're just like, if you're ready to sell your car or your house, sort of, what is, what does the post of that look like? You know, what does your life look like afterwards? And what do you need to do to make that a reality? And then work backwards from that. And you're right. You know, I've talked to owners who, you know, they knew that they had a, this one guy had a vacation home at Honduras, and he's like, the moment this thing sells, I'm out. I'm gone. And there's nothing wrong with that. And then another guy, which is more common, but another guy was like, you know, he's like, I grew up in this business. It's my family business. It's been here for decades. And we, everyone we know is in this town, I've lived this town my whole life, you know, he's almost 80 years old, and I'm not going to leave. So they're like, I'd like to be involved. I love what we do. But I just, I recognize that I can't run this thing anymore. And if, you know, and if I die, then no one's going to be here to run it. And so I'm just trying to have a

practical discussion about that before I hit the death, disease, divorce, you know, you know, issues. Yeah. Yeah, I think one of the things that I'm seeing a lot more of that I think is actually really positive is when you think about, you know, your typical W2s or typical employees, you know, for them, retirement is this sort of cliff. It's like, I'm going to work, work, work, work, and then there's going to be this day and I'm not going to work anymore. And I don't find that that kind of retirement works very well for business owners. The idea of I'm just going to go, go, go, go, go. And then I have this date circled when I'm 65, and I'm never going to work again. And I'm just going to fish 11 hours a day. I don't see very good outcomes from that. So I think the idea, like you said, of this sort of happening in phases, you know, you, I mean, it's just kind of human nature, you know, can you really go from working 70 hours a week every single week for 30 years to having all that free time available to you? Most owners kind of don't know what to do

with themselves. They get bored very quickly. So I like the idea of like kind of treating this in phases. Like let's pull back a little bit. Let's pull back the responsibilities a little bit. And that ends up building businesses that are much more sustainable and much more sellable anyway. Yeah, it's ironic how, you know, what's good for you is also good for the business, you know, pulling yourself back and allowing yourself to gradually transition out allows the business to gradually take over for you. And so you're building a better asset. Yeah, it's, it's supposed to be the idea. But I think this happened to me when I own my businesses. I think it's kind of an ego thing. It's, it's hard. It's, there is something comforting about going like, I'm the only guy that can do this. I'm the only person that can make this. This place wouldn't exist for two weeks without me. I think it's a little bit of, you know, an ego thing. And I think that it's also, it's really hard, I think for a lot of owners to delegate. I know it was for me. And it's something I see with a lot of the owners I work with is it's really hard for them to trust other people

enough to delegate like real responsibilities to them, because they probably had the whole business on their shoulders since day one. Well, you're exactly right. They've walked through the valley of the shadow of death for years, right? When they had to do everything and it was going to die. And it would have died if they hadn't pulled it through themselves. And so, you know, we may have gotten to a point to where the business can survive largely without them. But in their mind, they're still the ones holding it up, you know, with their shoulders. So that makes a lot of sense. Let's pivot a little bit. Now, like, so now you're working with a venture group, you're consulting kind of long as you do a full-fledged, like broker consulting type of organization here. And now you're dealing with first-time buyers yourself. Would you say, like, what percentage of business buyers are first-time buyers as opposed to, like, people who are looking to expand or enterprise buyers? I would say it depends on where you look. If it's biz-by-sell, it's 98%. You know, if it's any of those sort of public marketplaces, you know, if I go put,

if I go put a business up on biz-by-sell right now that's going to, you know, check the box for most searchers, I would say it's 19 out of 20 calls you get are going to be first-time buyers. Now, if you're doing, if you're sort of sourcing buyers more through, like, networking and more through other advisors and things like that, then it's going to be, I would say it's a little closer to 50/50 in my experience, but just generally sort of out in the world, people who are looking for businesses, I would say it's, I would be surprised if it's 90% first-time buyers. Yeah, that makes a lot of sense too, especially with the explosion that we've seen the last few years just within the small business by a business space. It's been wild. And, you know, obviously we get a lot of, you know, there's a lot of people who are unqualified, who are just kind of excited about the idea of buying a business. But now you're getting contacted all the time by first-time buyers who are interested. What kinds of, what types of advice would you give buyers to be competitive? Because you're talking about how like, you know, when you tried to come to,

when you went to Austin, you mean you're a qualified buyer, you have experience running a business, you were pre-qualified for SBA, you had, you know, the right capital, but you couldn't make the numbers work. And now it's a very competitive landscape, especially in Texas. So what kind of tips do you have for, you know, first-time buyers to help them distinguish themselves a little bit? So what I would tell most first-time buyers, and I've worked with people on the buy side that have actually done this successfully, is you're going to have to bring more to the table than money. That, you know, as a first-time buyer, the odds that you are going to be the highest economic outcome for a seller are probably pretty low. But the good news is that a lot of sellers aren't just interested in money, you know, that they have their kind of threshold where it's like, look, if I want to make retirement work, I have to sell for this. The thing I found with most sellers that I think would surprise a lot of first-time buyers is, let's say you have a seller and they're out the door numbers 2 million, got to get 2 million. That's the only way they can, you know,

make everything in retirement or whatever they want after their business work. I found that most owners, if they get a PE group that they don't trust that offers them 3 million, but they find a searcher, they really like it 2-2, they'll go with 2-2 a lot of the time. Now, again, if somebody comes and offers them 10 million, maybe a different story, but what I tell buyers is building their relationship. That's the thing. I think one of the things that particularly first-time buyers have never owned a business, I think they don't understand the emotional connection that most of those owners, because they're mostly founders, I don't think they really appreciate the emotional connection they have to that business, the connection they have to the stakeholders, and if they plan on staying in the community, you know, the way they want to protect their own reputation. And, you know, there's very few, I think there's a lot less sellers out there that would take an extra 5-10%, knowing that their employees were going to get fired, knowing that

their IP was probably going to disappear, you know, knowing that their legacy was going to be tarnished. I mean, most of the owners don't want to make that trade. So the thing that I tell buyers is really lean into creating relationship with that owner, because if that owner has an offer 2.5 million, and you can get to 2-2, and you can get creative with payback schedules and things like that, if they like you a lot more, and if they believe you're going to be a lot better for the future of their business and their reputation, they're at least going to be interested in hearing you out. And I've actually seen several buyers I've worked with have done that really successfully, where they've just leaned into creating, really what looks more like a partnership than just a transaction. Man, that is so true. That is so true. I tell people, I'm like, look, the finances are really not, they're not even close to the most important thing when looking to buy a business. No. You know, I tell people, like, the finances are like, those are table stakes. Yeah. They have to be there in order to have a discussion. And if they're not there, you can't have the discussion.

But if they're there, then at that point going forward, it's all EQ. It's building the relationship with the seller. It's understanding, you know, are you a good fit for this particular business? Are you a good fit for this particular seller? Because a lot of times, you know, the sellers are involved in some capacity post transaction. And so, wow, yeah, really good advice, making sure that you're taking time to actually get to know the person. I met an owner, you know, when I was searching, I met like, I must met like somewhere between 250 and 300 owners. And one of the phone calls was this guy who was running a landscaping company in the Bay Area. And we got on the call and just kind of hit it off. And he was a nice guy. He has a wife there. And towards the end of the call, first call, I'm like, hey, really enjoyed the conversation. Thank you for telling me more about your business. And he was like, they're both like, yeah, we really enjoyed the conversation too. And the owner just unsolicited was like, yeah, we talked to a buyer just a week ago. And it was the worst conversation I've ever had. You know, he started off, you know, you know, first time we talked interrogating our numbers,

talking about how we had too many employees. And it was just the most off-putting conversation I've ever had. I'm so glad we got to talk. And I never submitted an LOI in this company. It wasn't the right fit for me. But I'm just, I was shocked then, and I remain surprised at how many buyers just lack the empathy, like on date number one, get to know them first before you like start like scrutinizing everything about their business. It's amazing. Yeah, I tell the people that, you know, I've, I've advised before on the buy side, don't make that first conversation about anything technical or really make that first conversation about, you know, forming a relationship and, you know, tell them what a great job they've done with their business. Here's what I really, really like about it. Here's what I admire about what you've done with it. You know, a little flattery goes a long way, you know, you're going to have 200 more conversations with this person and they're going to be selling their most valuable asset and, you know,

business that they've probably spent more time with than their kids. Don't go right into the P&L in multiples. Like that's, that's really the wrong approach. Really focus on making this look like a relationship, making it look like a partnership because you guys are really partnering together on this transition. It's not like buying a piece of commercial real estate. And I think the other thing I would say is really focus on what makes you unique as a buyer. You know, that, that's the other thing. Is it your operational experience? Is it your specific industry experience? Do you have, you know, a background that's in HR or are you going to be able to leverage something from your background in that business that's going to be really uniquely valuable? Those would be the three pieces of advice I would give. I think that one's great. I really do. You know, I remember, you know, I talked to a lot of searchers now, you know, and they always tell me they're like, Hey, you know, I read the HBR guide and it tells me all the things I should be looking for in that beautiful,

perfect business, right? You know, recurring revenue, low catbacks, like all this stuff, like, you know, the 12 checkboxes and that doesn't exist. And so, so then they're like, Oh, what do I look for? And my, I always, always that talk to them like, well, what's the one thing that uniquely qualified to solve? You know, like your background, like you said, is it in HR? Is it in operations? Is it finance? Like, like, you have like, are you used to leading people or give a veteran? Like, what, what is it that you bring to the table that's unique, you know, and then find the business that could most benefit from that value? Yeah, that's, that's very good advice because you're right. That, that mythical business that hits all 12 checkboxes, I've never seen it. I've seen a thousand of them. I've maybe seen a business that gets like eight of them. Maybe, you know, it's just not how much you hit nine or 10 that they get snapped up before you'll ever see them. They're diving in the rough. Yeah. Well, and I think that that leads into a really good point, which is, you know, if you, if you understand that you're not going to find the perfect business, because the perfect business doesn't exist, and it really doesn't exist,

you know, in the sub 10 million dollar space, if you know, you're not going to find the perfect business, to me, that's an even better reason to find the perfect seller for you. You know, I will bet on a really good buyer with a really good relationship with a seller that both want to see each other when I will bet on that with a mediocre business over a good business where those two are adversaries every day. 100%. I tell everybody, I'm like, like a business is the direct reflection of its owner, like bar none, you know, you imprint yourself on that business with your hiring, with your systems or lack thereof, like all that stuff is a reflection of you as the seller. And if you don't have a good relationship with the seller, like at least a good business relationship, you are doomed from the beginning because you're not going to be able to write that ship. There's just no chance. And so that is always step number one. But yeah, you're exactly right because it is a, even if it's a short partnership, it's always, there's always a transition period. There's a partnership there. And I've seen, I have seen mediocre businesses with when the buyer and the

seller on the same page, and they can really take off. Yes. Yeah. And, you know, even if, even under kind of best case scenario, you know, let's say it's a, you know, broker listing, and you have that first call, let's say you close it in 60 days. I mean, that's hard to do, but let's say you can close it in 60 days. Let's say they're only sticking around for two weeks. That's still, that is a, that's going to feel like an eternity. I mean, that's still a long period of time where you're going to be talking to this person and their representatives on almost a daily basis. So even if we compress the thing about as much as we can, again, for a first time buyer that's an operator, I'm not talking about a strategic acquisition, but for that first time acquisition, even under the best of circumstances, you're going to be spending a lot of time with this person, and you're both going to have to trust each other. There's no cheating that trust. I don't care what legal agreements you have. There is no way around that. You have both parties have to trust each other for this to work. I'm so glad you said

that too, because one of the other red flags I ran into is people, you know, they're like, well, you know, I don't have to worry so much about trust in the seller because I've got this purchase agreement. I've got representations of warranties that are in my favor. Like, you know, I've got the, you know, the non-compete clause. I've got, you know, the seller's note, the earn out. I've got all these things that are written into place to help protect me as the buyer. And I just remind them, like, look, I mean, do you know anything about behavioral finance? People do things that are outside of their economic interests all the time, all the time. And, you know, you're only recourse if, you know, if the trust is broken and someone doesn't hold up their end of the bargain when it comes to the purchase agreement, your only recourse is litigation. And litigation is expensive and it's long. And in the meantime, you're still having to keep that business float. And if you and the seller are, you know, you're in court against each other, the business is failing. I guarantee you the business is failing. Yep. And even, even in the best case scenario, you know, if you do have,

you know, absolutely ironclad agreements and you get into that business and it, you know, turns out that there was fraud on the part of the seller, your best case scenarios, you're maybe going to recover half of it in about two to three years after you've been fighting and fighting and paying and arguing. I mean, that's really the best case scenario, you know, in terms of recovering something in the incident of fraud. I think it's way easier to just go find another business with someone you trust. I think that's a much better strategy. 100%. Absolutely. So moving forward into like the types of industries. So like by, by definition, a first time buyer has most likely never owned a business before, right? They're coming from a W2. And that means that they have no experience in the industry they're buying in, whether that's landscaping, or HVAC, or plumbing, or you name it, they have no experience. And so one thing that, one thing that first time buyers are really interested in is they want to find something that helps mitigate their risk. Because a lot of the ones who are a little bit, they understand that as a first time buyer, there's a

lot of things they don't know. And the biggest mistake they can make is buying a business that fails, right? And so they want to mitigate that problem as much as possible. And so I get the question all the time. It's like, what industry is the safest? What's the best, you know, recession proof business industry? Or does it matter if I don't have experience in this industry? What's your advice to a first time buyer if they're looking at an industry that they don't have experience in, or if they want to try and find one that's, you know, quote, safer? I'm not a big fan of the safe industries. I just, I think that there's way too much stock put into that. I will take a good business and a good owner and a tough industry any day over a mediocre business that's in a high value industry, at least again, in the small business world. I actually know some, I know some first time acquires that have been pretty successful just going and looking in industries where no one else is looking. I know people that have bought like music studios. I know people that have bought small restaurants. And the reason is because even though those

industries are really difficult, there are businesses that do well in those industries. And because they're not as competitive, and because searchers generally don't like them, you can be a lot more competitive as a buyer. And I know a few people that have specifically said, look, I know where all the ETA guys, I know where all the searchers are going. I'm just going to go somewhere else where I'm going to be able to stand out a lot more as a buyer. And I'm going to be able to get a much more competitive deal, you know, going and getting like a neighborhood coffee shop that you can get at two turns. You know, I think most people that have gone down this road can probably figure out how to run a little coffee shop. You know, you want to go pay like six turns for a SaaS company and compete with all those people. That's a lot harder in my opinion. So I think there's way too much made of sort of good and bad industries. That being said, if I'm a first time buyer, I would want, I would generally like to see buyers going in places where

there aren't going to be a lot of employees that are a sort of single point of failure. I think that can be really, really dangerous. You know, if I'm advising a buyer, I'm talking to a buyer that's, you know, going to go buy their first business, I'm going to go think about the worst case scenario and make sure it's something you can solve for. You know, right? If this person doesn't show up, if we lose this customer, I'm not saying it's going to be comfortable. It's going to be easy. Is it something you can solve for? Can you go in and fix that problem and keep this business going? That's one of the issues you see with license industries. Like if you're going to show up in like, you know, you know, construction or landscaping or plumbing or something that requires a license. And like, you know, let's say like, I'm a, you know, general manager and, you know, Qualcomm, you know, I don't have that license. And so most of home service businesses require a license of some kind. So, you know, what kind of strategies have you seen be successful? Do I need to be the, do I need to go out there and get that license? Does this really fall back on the

relationship with the sellers that they can teach me? Like what kind of things should I be thinking about, especially if it requires a license and I have no experience? Because I don't want to give you in a situation where I buy, you know, where I buy a construction company and I don't have a construction license, but my number one employee does and now they basically have me, they have me, you know, I can't do anything because I can't fire them. Yeah, I think, I think if you can get the license, that's always better. It's just going to give you more redundancy. And it's going to prevent that one license holder in the business from having so much leverage over you. Because that's, that's something that I think is really dangerous. But I, you know, there are times, I have seen businesses, I have seen licensed businesses that require licenses where the owners haven't held the license, but they've just been very careful in managing that relationship with the license holder and having really good plans around, you know, what happens if that person gets hit by a bus on the wire? You know, I think you can, I think you can mitigate some of that with planning, but I think in general, getting those licenses, it's just going to give you more options. I think

it's, it's probably a good idea. The times I have seen people that haven't had licenses, they've had a really high level of trust with the person that does, and they've had that person really incentivized to see the business succeed. Yeah, that's super important. And again, again, speaks to relationships. Because I mean, a lot of times you're in these situations where if you've got an employee who's a license holder, and they've probably been in the industry for a long time, they've got a lot of knowledge expertise, but they've never been an owner. And so getting to the point where you've built up the kind of trust where they're in with you as a partner, or you've incentivized them with equity, half the battle isn't like giving them the equity. It's helping them understand how the mindset change. Like, oh, I'm an owner now. Like this matters, because you run to the same issue with these, with these industries where, you know, the labor force is in high demand. And so if you're that kind of person, you have that kind of license, you've been working for a long time, that's why the relationship is so important, because that person could just as easily

quit, join a competitor tomorrow and do very well for themselves. Yeah. And then you're going to have to go out and hire a license holder immediately, and you're going to have to give them whatever they want. Yeah, exactly. Whatever they want. Whatever they want. Yeah, that's a tough spot to be. So that kind of leads into my next question, which is, you know, you recommend either get the license yourself or, you know, build a really good relationship with whoever your license holder is. But at the same time, if we're talking SBA level businesses, you have to be at the, as the buyer, you have to be ready to walk in and roll up your sleeves and get into work. And I'm not saying that you're going to, if you buy a plumbing company, you're going to be doing the plumbing yourselves. But you should understand how that works and get out in the field, because you can't just sit in the office and run the business, right? Yeah, that's, I'm sure you see this a little time, but that's one of the big myths that's floating around out there as you go buy a business for a million dollars, then you hire an operator for 52K a year. It's just, it's total fantasy. I mean, I'm trying to think, because I've spent my whole career in the kind of like one to five

million dollar range. And I've maybe seen, I mean, out of the hundreds and hundreds of businesses I've seen, I've maybe seen three that were really like that, where that owner was really just going through financials once a month, weighing in on strategy periodically, you know, they didn't have to have their phone turned on. I mean, that's very rare in this space. It just doesn't happen. And every listener everywhere is like, so you're telling me there's a chance. Yeah, yeah, yeah, I'll put it this way. You're a first time buyer. I like your odds of winning the lottery without buying a ticket better than you finding one of those businesses. It's just they're not out there. I mean, generally, like what I see the kind of the meaty part of the curve, you know, for the kinds of businesses we're talking about, the more, you know, kind of B2C service oriented businesses, if they're under five million, I don't even know that they have managers in there. The way that, like we think of managers, now they'll have a manager on payroll. And if you ask those owners,

they'll say, Oh, I have a great manager. But you start peeling back the layers on that onion a little bit, and you find out they're really supervisors, you know, the owner is the one in there every day that has the owners, the only one with P and L accountability or financial accountability. They're the only one that's doing anything strategic or any kind of planning in the business. And you know, those managers are really there and more of a supervisory capacity, doesn't mean they're not good at their job, doesn't mean they're not valuable, but they're not hands off executive management. I always see that as like you mentioned it, but that is my test question. Does the manager have P and L authority? And if they don't even know what you're talking about, they're not a manager. They're a foreman, they're a supervisor, and there's nothing wrong with that. You need those people, lots of them. But you know, just because you've been leading the team for 30 years, doesn't mean you know anything about the profit loss data. And if you don't, then you're not managing the business whatsoever. No, if there's if there's no P and L accountability, I don't think manager or director or chief should be in the title. That's my absolutely.

Yeah, absolutely. Okay, so lots of really good nuggets for for buyers here. So we've talked about the industry a little bit. And you mentioned that most of your operations have been in that one to one and a half million dollar space. A lot of buyers asked me, they're like, you know, there's this back and forth, should I buy small or buy bigger? And in this case, what we're talking SBA bigger is like that $5 million. And in the grand scheme of business, that's still incredibly small. So yeah, yeah, what's your opinion as far as if I'm a buyer, you know, do I want to kind of target the smaller one to $2 million revenue businesses? Because, you know, maybe I don't know as much, maybe I want to learn, maybe that feels quote safer. Or do I shouldn't be even as a first time buyer, should we target those four to $5 million businesses because they're bigger, they probably have a little more stability, maybe a little more runway for me to learn without breaking something. What's your opinion? I think smaller is better. I think that, you know, that there are the businesses, you know, as they get bigger, they do get more sustainable and they do

theoretically get easier to run. That's why they're a lot more competitive on the buy side. And in my opinion, you know, if you're a first time buyer, it's not really about, you know, what is the perfect business for me, it's what business can you win on. And, you know, this was this was one of the problems I had with my search is, you know, I was the worst buyer at the table on every business I saw. If I was just being honest with myself, you know, you know, we're gonna have to have an SBA appraisal, it's probably going to take 90 days, you know, I have people that are writing, you know, checks for 80% that day. It's like, I can't compete with that as a buyer. So I think, you know, if you go down market, really in like the sub million in earnings, but particularly sub like 500,000, yeah, they're harder to put that on, you're going to have to grow it a little bit more quickly. But I think there's a lot more of those businesses and there's a lot less people looking and there's a lot less competition on the buy side. That's if I had to go back and do my search over again, I was really looking kind of 500,000 SD. I turned my nose up at a couple

businesses that were in that 250 to 300 range. I wish I would have been a little bit more open to those because I think I could have won out as a buyer. And I think that I probably could have turned one of those businesses into the ones I was chasing. I don't want to say easily, but I think I could have managed it in a year or two. Sure. Well, you know, probably the number one criticism I can hear from a first time buyer is, well, John, I'm not buying a business, I'm buying a job. What do you say to that? I would say you're buying both. You know, I, again, we talked about this, this idea of passive ownership, you know, go buy securities. If you want passive ownership, go buy Tesla stock or something. It just, I don't think it really exists in this portion of the marketplace, particularly if you're a first time buyer. You know, when I think about like really passive businesses, you know, where you're the single acquire and you're really functioning as an investor, you really got to get north of like 10 million, I think. I mean, that's what I've seen.

It's very rare that I see, you know, the two, three, four million dollar businesses where the owner doesn't have a job, you know, there's going to be, there's going to be some responsibility attached. So now it might be 15 or 20 hours a week. I mean, I've seen that, but the idea that you're going to go buy a three million dollar business and then go kick your heels up on the beach. I just, I don't see it. I just don't think it's practical. Yeah. No, you're exactly right. It's, it's one of the biggest myths out there. And, you know, we kind of alluded this already, but the myths over and over and over is a, you know, passive income. I can just hire a general manager and I don't have to be a part of it. And, you know, I can maybe put in five, 10 hours a week, maybe at the most, you know, just managing the manager, right? Sure. Without really thinking about what happens if my manager gets sick or, you know, has an issue with their kids or decides to quit, you know, what happens? Am I going to step in now? So that's, you know, myth number one. Yeah. Just to, just to pick a part that, because I love this one. I hear it all the time. Think

about the kind of candidates you're going to get for $55,000 a year. I mean, if you're going to spend $55,000 a year out of your cash flow, that's really a salary that's about $40,000 a year. That's what dishwashers make. You're really, you're going to entrust them with this asset. They're going to have the experience and, you know, the incentive to take really good care of this thing. Like, I mean, I, the owners, I tell, I say, you better budget 150 on that line. I mean, that's, that's really, if you want to pay somebody who's qualified that's going to take really good care of this thing, that's going to be able to take over your responsibilities, the salary is going to start at about 110 to 115, then it's going to be burdened, then you're going to have to have bonuses, you're going to have to have phantom, you're going to have to do a lot more than a $55,000 hour line. And that's just, that's not even in the book. Yeah, you're exactly right. And the key term you let you drop there was like, take over this asset, because the thing you're missing is it's not just hiring someone to do the job. But as the owner, you're still responsible for the debt

because you bought the company. Whoever you hired is not responsible for the debt. So, you know, ultimately, no matter what they do, you're the one has to make sure the bank gets paid every month. And so it's all on you. They have no risk. You have all the risk. And so who are you going to trust to manage the asset that you are 100% responsible for? That's a great question. Yeah. And again, I even think now it might be getting closer to like 175 or so. I mean, to really to find that one industry specific, industry specific, but it's, I see that number growing more and more, or I see a lot of people mixing in, you know, in a profit based incentives and things like that. But, you know, I think the moral of the story is like your business is going to have to have real cash flow if you want to start downsourcing a lot of the ownership responsibilities. And until then, they're all going to be on you. So yeah, so great points. There's no passing business. Don't try to buy, don't try to hire a cheap manager. What about like, you know, hear this a

lot, no money down? Like, can I buy a business if I'm broke? Or it's not just broke. Like, what if I've limited financial assets? You know, should I be looking for those 100% seller note type businesses or, or, you know, is that something I should even entertain? No, it's pure fantasy. It's all nonsense. I don't mind saying it. But you're just saying that because you're a broker. Yeah. There is, there's two scenarios where you can go buy a business with no money down. One is where you share DNA with the owner. And the other one is when that business is two minutes away from liquidation anyway. That's really it. I'm not saying it's impossible. You might find an owner and just have such a good relationship with them and they might hate money so much that you can talk them into it. I wouldn't bet on it. I don't think it's a good strategy. The way I explain this to people is really simple. Would you sell your car to a stranger for no money down? And they go, well, no, how would I ever get paid? And I go, so you're going to do

that with your business? I mean, it's just, it just doesn't make any sense. You would never sell anything valuable to a stranger that has no risk in the equation. It's just, again, I know that's, that's another one of those myths that's floating around all over the place. Now, I think there is a lot that can be done in actual creative financing. And I think it's important. And I was just on a call earlier where I was telling somebody that, you know, I, I really do want to see the sellers finance something. I think that's important. I think it gives them buy-in. I think it makes the lenders a lot more comfortable. I think it should make the buyer a lot more comfortable. So I am a big fan of seller financing. I just don't see 100% of it. I would never recommend. I wouldn't even recommend an owner do that with their kids. You just, you should not have an asset that's that valuable that changes hands without any value going in the other direction. Yeah, I could not agree more. And because like you said, you have to show like the commitment, you have to show the commitment that I'm taking over this financial asset in a real, tangible way.

Am I putting money down? Am I, and not just like, Oh, I put a dollar down to make this contract legal. Am I putting actual cash down? Am I a legitimate buyer? And with things like the SBA program now, everyone is a legitimate buyer. So there's no real excuse for you. And so, but I like what you said there about creative financing, because one of the things I like the most about the small business space is that it is the Wild West of capitalism. It really is. You can structure any deal, any deal. And you can, as long as you can write it down in a contract on a personal agreement, and both people agree with it, the world is your oyster. It is. I mean, I've signed deals where, you know, we put in seller financing large portions of it. Yeah. And we're trying to sit over 25 years with a five year balloon. Like, yeah, you can do all kinds of interesting things, you know, that meet everybody's expectations. But you have to be very clear, like, there has to be a cash transaction. Yeah, it's got to be something, you know, and again, I know there's exceptions for, you know, strategic acquisitions, like rollups, and there's always the outliers. The way I always talk about the no money down stuff is just do not use this as your

strategy. That, you know, I'm not saying it can't work. I understand how independent sponsors work. That's not what I'm talking about. I'm saying you're a first time buyer that has no money, you're going to have to really measure your expectations about the reality of the opportunities you're going to get. But even then, that's not no money. Independent sponsors are just bringing somebody else's money. That's it. Yeah. You know, and so you're exactly right. I think those 100% finance deals or like 80% plus finance deals, you know, do they exist? Sure. I could probably go on, like, Will Smith's acquiring minds and find one or two episodes about someone who bought like a $5 million seller finance business, a good one, right? But they're incredibly rare. 99% of the time it's you are a family member of the person who owns the business, which makes, which can make a lot of sense, you know, when it comes to like estate planning, sure. Or it's the business is distressed. And if you're a first time buyer, buying a distressed business is one of the riskiest things you could possibly do. I think it's a horrible idea. I think even for the only time

I like anybody in this sort of part portion of the market buying a distressed business is if you're a direct competitor and you just you understand that industry and the market so well that you know, you're looking at something that you can, you can be pretty confident you can turn around with sort of limited resources and uncertainty. Outside of that, I just generally don't like it. It's really hard to, it's really hard to get a small business turned around once it's going in the wrong direction. Yeah, could not agree more. Wow. All right. So no passive business, no money down is a joke. I'd like to say one more thing. Since we're talking about myths, because I think this ties in really well to the sort of EQ, you know, when you talk about first time buyers, I hate the term boring business. I can't stand it. I think it's insulting. I've heard of people actually using it in front of sellers. And I think it goes a really long way towards, I think, painting a buyer somebody that doesn't take the investment the sellers made very

seriously. That is a term that I would I would really like to see go away. And I will tell anybody that's a first time buyer, you got to strike that from your vocabulary. Absolutely. And I understand why it's there. I understand if you're talking to, you know, corporate, especially corporate Fortune 500 W2 employees, and they're used to working in like, you know, CRMs and all kinds of interesting things and like, Hey, let's do something quote boring, you know, plumbing, HF, boring. Like, I, I get why that tracks so well, but I could not agree with you more. There is nothing boring about running a hundred person operation in a $7 million landscape business. There is nothing boring about nothing. Nothing. Yeah, I think it goes back to a little bit about what we said about that idea of sort of passive versus active. You know, I mean, I've never seen, I'm trying to think, I don't know that I'd ever seen any business in the sub $5 million market, where I would say it was truly boring for the ownership. I mean, I'm sure they're out there,

but it's like, even if you know, even if you only have a handful of employees and a handful of contractors, you know, you still have competition, you still got to make sales, you still got to run a business, you still got to deal with people. There's nothing boring about it, you know, every, I would, I would encourage every buyer to assume that it's going to be a lot of hard work no matter what they acquire and where it is. Yeah, absolutely. I love that. I really do, especially that just, that's one of the terms that's really going to be the wrong way for a long time. But you know, again, it's a PR thing. And you know, ultimately, I am appreciative and I'm excited about the idea of more and more people getting interested into the, into the space, interested in the idea of owning a small business. Because if there's one thing we can really use right now, it's a lot more small business owners. So I, I agree. If it gets you interested, that's great. Yeah. Understand the EQ portion. Like again, like if I've run, if I've run a plumbing business for 35 years, it's not just that I built this thing from nothing. It's not just had sleepless nights and

you know, almost miss payroll and had to fire people and went through the financial crisis of 08 and went through the recessions. It's not just, and it went through COVID no less. It's not just I got through all that stuff, but my business paid my mortgage and put my kids through college. It's funding my retirement. It's like you said, it's, it's an incredibly emotional connection there. And so the boring is the last thing I would call it. No, no. And that's, you know, it gets back to what we mentioned earlier that, you know, for the, for the buyers that are coming into this for the first time or coming into the space, I really, I don't think you can overestimate that kind of connection they have to the business. And it's not just the logo. It's not just the customers or the employees. It's, it's not the sort of individual facets of the business. It's really, it's a piece of the owner's identity. I mean, it's probably, I always say, you know, it's, it's probably the first way they've introduced themselves for 30 years. I'm Joe So-and-So of Joe So-and-So, or, oh, what do you do? I do that. You know, it's a,

it's a very big part of their identity as a person. And I think the more buyers can be sensitive to that. And I think the more they can understand the transaction and that sort of context, I think the more successful they're going to be. Yeah, could not agree more. All right. So we're starting to wrap up any final words of wisdom for first time buyers out there who are looking to stand out. Um, so I will say this. There's a lot of very bad business brokers out there. I don't, I don't often defend my profession because it's, it's a completely unregulated space. There's, frankly, a lot of people involved in it that shouldn't be there. I would like to encourage the buyers, though, do not treat the brokers as adversaries. Brokers have a difficult job. 99% of the calls we get are from people that are not interested in good faith transactions or aren't qualified to make them. I would just encourage all the buyers to understand that there are good brokers out there

and the more professionally you can appear in front of them, the more successful you're going to be. I've seen some people advocate for, you know, uh, papering the town with LOIs all over the place and you know, circumventing brokers with their sellers and things like that. Again, I'm not defending every broker under the planet. I think that my industry could do. Um, I think it could improve a lot in terms of just general professionalism. I'm just saying, if you're a buyer and you want to get your first one across the table, treat brokers professionally and don't be surprised that if you don't, that they're not going to call you back. Yeah, absolutely. Well said. I tell people, I'm like, you know, like you said, there's no licensing requirement to be broke. No. And so it's literally anyone who raises their hand and says, I'm a broker all the way up to like middle market investment bankers. There's a wide range there. And the more you get out there and start searching, you can start to, you know, you can start to sniff out like who actually has their stuff together. You know, did they put time and effort into the Sim? You know, are their ad backs

reasonable? Do these things make sense? Um, are they, you know, are, is this their full-time profession or are they moonlighting when they're not selling real estate? Could be a could be a red flag. Yep. Yep. Yeah. Yeah. I think like you said to, um, understand the kind of broker you're dealing with, you know, if you are dealing with a broker that has a commercial real estate license, you're going to have to interact with them very differently than somebody who's been an M&A advisor for 20 years. You know, that's part of the process is you're going to have to get good at sizing up, you know, these professionals because it's very likely that, you know, they're going to be the person that you have to go between to get to the seller to buy this business. Um, get really good at sizing them up and knowing what kind of person they are. And, you know, you're going to have to sell them on yourself as a buyer as much if not more than the seller. So just be prepared. Yeah. Yeah. Exactly right. So, all right. So if I'm an owner or a buyer in the state of Texas and I'm

interested in getting in touch with you, or if I'm just a searcher, I'm looking to get some more questions asked. Where can I find you? Just go to VenturaTexas.com or you can find me on LinkedIn. Okay. VenturaTexas.com or LinkedIn. Yeah. Excellent. Well, thanks for being here, John. I really appreciate you all your insight. This has been fantastic. Yeah. Thanks for having me. I appreciate it. I love talking about this stuff. All right. Great.