Buy It, Don't Build It - A Guide For Buying Businesses (Part2)

 

"Patience and Diligence, like faith, remove mountains."  - William Penn

I like that quote but I would change it to "Patience and Due Diligence, like faith, remove mountains." In investing and business nothing beyond good and proper due diligence paired with having the patience to jump on only the great opportunities, that have made it through thorough due diligence, will allow someone to succeed at the highest levels. 

This will be the second part of my Buy it, don't build it blog series. If you haven't read the first part I would recommend you go do that. Buy It, Don't Build It - A guide For Buying Businesses (Part1) 

After I found the platforms that I would search to find my first online business acquisition, It came time for me to begin sifting through the mountains of candidates. For doing due diligence of this many possibilities these are the steps that I recommend. No matter the size of the investment or the team that is going to put together the deal or manage the asset after acquisition all due diligence follows these basic steps. 

1. Disqualifying Deals

Like determining what your going to wear during a blizzard you know you wont be wearing the cargo shorts and V-neck combo you bought from Target. Disqualifying businesses should be this easy to do and take no more than a couple seconds. Typically on something like Flippa you should be able to do this just by seeing the snapshot of the listing as you scroll through the list. For the businesses I was looking for, my disqualifying factors were.

     Disqualifying criteria

    No Revenue

    No Income Verification

    No traffic Verification

    Monetization of retail or drop shipping

    Any type of business that went against my morals

If I saw any of these as I was scrolling through the different listings I skipped right over those. This would allow me to go right into my next phase.

2. Deal Math

This step, depending on who does it can be broken down into various steps spread out over the entire due diligence period or can be done in a one big lump sum and as long as no factors change then they never have to return to the math. For me i break it up over a couple different parts. I do some quick math to determine what multiple of monthly profit i would be purchasing the business at and i also want to know some fundamental numbers and figures, mainly 

    -Is profit steadily increasing month over month or does it vary with large spikes every couple months and then dropping down below the average on other months?

    -How fast will i be able repay the fund that i built to invest in these businesses?

    -Is there extra numbers that may not have a monetary value to them but could, if i built out a way for those numbers to be monetized. An example of this would be a email list or social media page with a following not being monetized.

If the Site has wide fluctuations in earnings or traffic i want to understand why, it may not be a bad thing just so you are aware. But contrast a business that pays for advertising that has wide fluctuations in income and viewers or users each month with a business that doesn't pay for advertising and has steady month over month growth, which business do you think you would want? If you have made this far let me know and tell me your thoughts and why in the comments down below. 

3. Negotiations

This is the step most people don't want to deal with, Talking to another person can be hard and then telling someone that you like what they have worked so hard on but you want it for less than they are asking, can be hard. The topic of negotiating is huge and if your in this world i would recommend you take time and learn to negotiate, if your just starting don't worry i got the book for you! Check out Chris Voss's Book "Never Split The Difference" The book is an amazing read and should help you get a much better idea on how to negotiate. plus there are some really cool stories of his time as a the FBI's lead hostage Negotiator. That being said lets move onto my real world example of my latest acquisition and you can see how easy negotiating can and should be. 

 Purchase of Perfection 

After narrowing down my platform and criteria it was time to begin looking for an acquisition. I found quite a few that I submitted offers on. Many of which were full price offers but most fell through simply because the sellers never responded to my offer. Some were below their asking price and others fell through when i found out something that changed the circumstances of the purchase. An example of this was during my deep dive on a particular Saas business i found a review stating that the company wouldn't release a persons monetary withdrawal from their system. After getting a hold of the man and talking with him on the phone i discovered the current owner wasn't allowing anyone to remove their funds from the platform which may or may not be illegal, but it definitely was a debt that was not on the listing. If you ignored the potential legality of this issue at first you might think that the price i had negotiated was a great price even with this unknown debt on their books, but something didn't feel right about the deal and so i backed out of it. I will always recommend that you follow your gut, if something doesn't feel right then don't go through with the deal. After about a dozen deals like this over probably three weeks, I found a new listing for a Shopify Store App called Perfection. Even I could tell with my limited coding knowledge that the app was very simple. All it does is find and replace text in a store owners listings all at once. Lets take a look at how the transaction played out.

Originally listed for $10,000 it stated that it had verifiable income through a Shopify Partners account. Just looking at the listing as i was scrolling through the listing i could tell that it passed all my disqualification tests. So i decided to look a little further. Going through the listing a few things stuck out at me, First was that the month over month growth of the store was steadily increasing about $10 a month for the last year. there was no advertising costs and its average monthly profit was about 75% of what the last two months were reported as earnings, This means if i simply held it till the average caught up to the current profit i could sell it for a profit in as little as 6 months. The other thing was this looked super passive which is what i want and it also matched my desire to own something in the software space. It met everything i was looking for, consistent growing revenue, super simple, recurring revenue. This was a great candidate for an acquisition in my books so i immediately determined that 24x the average monthly profit was about $3600.

Now on to the negotiations 

The listing was for an auction that would end in a few weeks so i started off by sending the seller this message "Hey Seller can I just buy it today for the $3500?" He quickly responded which was a great sign which told me it was more important that he did the deal quicker than squeezing every last cent out of the sell. This is the type of seller you want to work with, it means they have other motives to do a deal other than just kicking the tires or selling because of some unrealistic expectation of making a million dollars. His response was that the buy it now price was $5,500 and i told him i wanted a couple more minutes to look through the listing and i took the opportunity to ask him how much time he spent on development. He told me not much, only about 3 hours since he released it two years ago. After looking through everything and seeing that at the average of $150 a $5000 purchase price would leave me with a 34x monthly profit purchase ratio and at $200 a month profit it was closer to a 25x ratio. This was acceptable to me as it was still almost 4x my normal ratio of what i was getting for rental properties. So i shot back that i could probably wrap up the whole transaction tomorrow if we could agree to a $5000 purchase that night.

He agreed, now it took a couple days to get to the process of getting my fund onto escrow.com which handled the transfer of the money and over saw the asset transfer process as well but all in all it took only two days to complete the transaction. I have had it under my ownership for 17 days, as of writing this, in that time It has made almost $100 for me which is on pace for the $200 a month.

Since going through the app a few times on a test store and going through the code I've decided to make a couple changes to the software that i believe will immediately make the app more money and improve the reviews, currently sitting at a 3.5 star review with i think 5 or 6 reviews.

Conclusion

If you are reading this you are probably like me and love the process of investing and building businesses. I find this stuff so much fun, especially locating a great deal and realizing the worth that is in it and then negotiating a win win transaction. I hope this gives you some inspiration and a little bit of knowledge on how to do something similar. Most people assume that buying a business requires a lot of money but it doesn't as I have just demonstrated. It does take a little creativity and some insight though. If you are struggling with finding a business to build then I would challenge you to go and find one to buy. If you want or need help with how that might look for you then come talk to me, I do at least 1 free consulting meeting for anyone. I would gladly help you figure out your next few steps towards the life of your dreams.

One last thing, as always I am not a financial advisor so nothing I talk about is a recommendation to do anything, This is simply here to inspire and educate. Now go forth and conquer