Richard Parker has bought and sold several businesses of his own and now assists others with education and consulting on
buying a business. Here we discuss the current buying environment and why it is a great time to make a purchase. We also discuss how the lack of traditional financing is affecting the industry. We then discuss how to approach a competitor you may be interested in buying, when to get the seller out the door and when to keep them on board, the importance of confidentiality and when buying a business different than your current business is a smart move.
Small Business Podcast: Hello everybody. Welcome back to the Small Business Podcast. Thanks very much for joining us for another show this week. As usual with all of these interviews the idea is to give you small business owners and entrepreneurs something to think about, give you strategies to take in, improving your own business and the profits you have and hopefully having a whole lot more fun doing it. We've had some variety of different interviews over the last couple of weeks and a couple of bit on selling your business. We're going to take the opposite side this week and we're going to talk about buying a business and in this struggling economy if you can call it that, is this the time to be buying businesses and one of the kind of questions and pitfalls and caveats you should be aware of and so our guest today is Richard Parker. His company is Diomo Corporation. He's got a great website that talks about these issues. We're going to talk to Richard about some of the things that you need to keep in mind when you're thinking about buying a business. So Richard thanks for joining us on the show.
Richard Parker: Well it's my pleasure to be here.
Small Business Podcast: Well, let's kinda start with the background. I would like to hear from people how they get into this. In the first place what made you specialize in teaching people how to buy businesses?
Richard Parker: Well I will give you a shortened version so that I don't bore your listeners but basically 18 years ago I started my own business and at that stage I was working for a company, I was doing very well making most people considered to be a pretty good living but had managed to lose a ton of money in the stock market and realized that the only way that I was going to be able to get out of the hole was either win the lotto but I don't play lotto, go to Las Vegas but I don't gamble or go into my own business. I mean it's the only way that I'd ever be really be able to get ahead substantially get ahead and decided to get into my own business which I did and shortly after starting out I had an opportunity to acquire a business that was related to what I did. It was not the same product but it was an ancillary business and I just figured that that would be an unbelievable business to bolt on to my then existing company and even though I didn't have the money I managed to beg, borrow and steal and find the money to make the small acquisition although everybody thought that I was completely crazy to be buying that company which was in complete disarray. And I brought the company, this was 1990 for a $100,000 you know fast track that company turned into a $4.5 million business and as time went on I started buying companies to add, to deal more business and deal more platform. Most of them are related. The odd one wasn't. The ones were related I ended up closing. I didn't do very well with those so I started learning some great lessons along the way and started garnering a bit of a reputation for being able to acquire small businesses and had people coming to me looking for consulting and started doing that and I sold one of my businesses for quite a bit of money in 1996 and relocated from Canada down to Florida and have since become an American citizen by the way, one of the greatest days of my life.
Small Business Podcast: Congratulations.
Richard Parker: Thank you. That was January 23, 2007 and I was looking at to make an acquisition down here in Florida where I'm based in 1999 and I looked at a lot of businesses and keeping in mind that I was very well versed in buying small business because I had looked at many, many of them over the years and then acquired 10 of them and started getting very involved in the process and the business what was represented to be turned out to be a house of cards and even though the brokers, the accountants and the attorneys all thought it was pretty good, something inside me just kept telling me that this was not what was represented to me and the more I dug into it and got very profound and aggressive and diligence realized it was a complete house of cards and I said to myself on the day that I told the owner that I'm not going through with the deal I said you know the average person would have bought that business and the only reason why I didn't is because I had the experience in other businesses to look for things that most people wouldn't look for. And I'm not the smartest guy in the room. I just had a lot of experience with these type of transactions and I became very intrigued about the concept of people buying small businesses and what resources were there and again I sold my business. I wasn't financially driven at that point but I was way too young to retire and started looking to see what is available to the average person who either is laid off or has enough of the corporate world or really wants to realize their dream of going into their own business and realize there were no resources for them. There's you know the more polished merges and acquisition people wouldn't deal with the low end buyers and rightfully so and there was no information that was available to people. I mean there was some books you know like the you know The Idiots Guide to Buying a Business you know or a book that you had to be a business school graduate to understand but there was nothing in the middle of the road that really took people through the whole process, got their head right, give them a good combination of attitude and aptitude and walking through the whole process and also made available the ability to consult with them on an ongoing basis to help to them throughout each of the different stages. And so I devoted a tremendous amount of time to research and realized that if I ever want to go into another business I want to go into something that's internet based and you know that was the genesis of the first original course which was launched in April 2001. I had no financial goal for my idea and I remember my wife asking me the night before the website launched how many I expect to sell and I said you know if I sell one and help someone buy the right business or avoid buying the wrong one it will be worth the whole labor of love and low and behold it's soon going to be eight years later and we've got nine to 10 guides today. We sell in 80 countries of businesses despite the economic gloom and doom. I mean our business is absolutely going through the roof and it just turned into an unbelievable business on it and it's nice because I get an enormous buzz from helping people and we've had just thousands and thousands and thousands of success stories.
Small Business Podcast: Yeah, there's so much to the subject. We could do a weekly series or a daily series for an hour and it take us months to get through all of this so I'll have to do several of these interviews but since we're kind of in this economy right now let's focus on one aspect of it and talk about buying competitors. If that's during this time, if it's a good time to do it. So we should probably start by saying, is a recession or a down economic time a good time or a bad time to try to buy a business.
Richard Parker: Well, it's probably both. I mean I do believe that from a deal structured perspective. It's probably the best time in the last 25 years to buy a business and I say that because it has always been a seller market. A seller would have a wealth of buyers to choose from, a buyer pool was huge, a good business sold very, very quickly and so anybody who is putting their business up for sale could pick and choose between their buyers and the deal that was best for them. That's all changed with the current economy in the financial meltdown because you can't
finance small business purchases like you could before if you don't have an existing relationship with a financial institution or the resources to do it the money is simply not there. So what that has led to and then you add the fact that so many people who may not have any entrepreneurial background it's very easy for everyone else to convince them, hey you have to be out of your mind to buy a business now. So the buyer pool has shrunk drastically. So from that standpoint from it shifting to a buyer's market as opposed to decades of a seller's market from that standpoint it's an incredibly good time to buy a business. The flipside of that is you have to be extra careful because there are so many businesses that are in the decline and you don't know the extent of it. It's not just a matter of measuring someone's business; it's measuring the customers of that business as well.
Small Business Podcast: Right. That was my next question to you because we all think that we can do a great job with somebody's business but if I'm a florist and the florist, a couple of miles away is going to close their doors, how do I know if that's something I want to buy because I can manage it better and will turn it around or hey, it was a crummy location even I couldn't do any better with that. What do I need to do that to find that out?
Richard Parker: It's a great question because its very easy as a casual observer to think that you can do better than the existing owner because its always easier to point out the negatives than it is to point out positive attributes of the business especially when you're in the similar business, right because you have a tendency to say, oh, he shouldn't do it this way or she shouldn't manage the business this way etc. It's very important that you want to make sure that if the core even if the business is in decline presently because it's not unheard of I mean majority of business right now are having some difficulty is to drill down to the fundamentals of that business. Leave aside the issues of the immediate related to the economy. The business is down 20% because everybody's business is down to 20% in that particular industry if that's your assessment. Are the core fundamentals of that business pretty good? If these were "normal times" would that business be doing well and would the levels of revenue and profit of that business sustainable. Can I as a business owner, you have a huge advantage in one regard which is saying can I continue to run that business without taking any compensation over the course of let's say the next year or so and build that business instead of paying the owner before a salary that he used to take out. Can I leave the profits in that business and use it to grow the business not just to keep in business for cash flow to stay you know one nostril above the water but to really grow the business or can it throw off enough cash flow that I could put that into my own existing business. You know I built all of my companies on that premise. Whenever I bought a company I never took a penny out for a year. So if I bought a company that is making a hundred thousand or $750,000 I never took out a penny and I used all that money for marketing or infrastructure or systems or growth whatever the case maybe. So as long as the business is down the road it could just be a crappy business. So you have to look and say, okay leaving aside the current economic conditions, is it a good business? Now if you're already in that business or a similar business you can make that assessment pretty quickly. It maybe that the lease is you know paying too much in rent, it maybe you know the florist, it maybe that there's a lack of business, it maybe that they used to do a lot of event planning and/or for corporate event planning as an example and corporate events are declining substantially. So you have to just drill into the fundamental to the business and say in normal times would that business have the fundamentals to you know for it to be deemed a good business.
Small Business Podcast: And realize that it's not just the purchase price but I'm going to have to probably if not throw more money in it and certainly reinvest everything that's coming into.
Richard Parker: Correct. But that's an advantage too because you know as long as it's throwing off cash flow and the deal numbers make sense. If you don't need to use that cash flow to put it into you own pocket you can fund the business to a much higher level than the prior owner have to because he needed here, she needed to leave off that business.
Small Business Podcast: This brings up another point then is do I pay that owner a salary and keep them there or try to get them out of the door as quickly as I can.
Richard Parker: I hate to keep answering some of these questions like a politician but it sort of you know both situations apply.
Small Business Podcast: Sure. Sure.
Richard Parker: If he's going to be a hindrance to the business you want to get him out as soon as possible. If he's not contributing anything positive to the business you want to get him out as quickly as possible especially because you understand the business. If however, you deemed that they maybe an integral part of the business and can really help grow the business but perhaps their administrative skills are not positive that you could lend to the business and personal relationships that they may have and using the same example of the florist and commercial accounts they have relationships with a number of local companies with whom they've done business for many years and is worth keeping them their and those scenarios that make sense. You may just want to keep them as an ambassador, as a face on the business and you know call upon them as you need them typically speaking unless they bring significant inherent value to the business. I've generally been of the mind that you're going to be operating that business as opposed to just letting it run absentee. If you're going to be operating that business I fundamentally believe that the sooner you can get in, get your arms around that business and the quicker you can get them out of the way, the better.
Small Business Podcast: Now the question then becomes is how do I approach a competitor who maybe for the past 10 or 20 years I've been competing against and maybe we're not best friends but we're not antagonistic either, is there a way I can approach them without being insulting or maybe say, hey I have a solution how about we take a look at this idea.
Richard Parker: It's a critically important question. Confidentiality in the sale of a business between two parties who don't know each other or who are unrelated is a major issue. So one can only imagine the extent to which that is increase when you're talking about your competitor of course. The best way to approach a competitor categorically is I always say with no briefcase, no pencils, no pen, hands above the table, call them up and tell me I want to go for lunch. That's the best way to approach a competitor. Avoid talking any business if possible initially. Basically going out and telling them, look I maybe interested. You know now is the perfect excuse because the economy is tougher. Everybody is feeling it. I think it would be worth both of our time and effort to potentially explore some opportunities that may exist that we can collaborate or maybe merge or maybe I could potentially buy your business but I'd like to have a discussion with you I mean the idea is you know get him in a very casual setting outside of the business and sometimes out of the area and have that initial discussion because until you start getting to a position of exchanging documentation and disclosing information they're going to be very leery. They are thinking you're just no good and you're looking for information. So you want to be very, very cautious and from the get go you should tell them and say, look I am happy to sign any type of confidentiality you or your attorney would like to put together obviously of course its reasonable. I'm not here to you know to cover up an intelligent gathering on your business. So very, very, very, casual and that differs from you know an individual who is looking to buy a business because you can go right away and say, I'll sign an disclosure. I need to see your financials.
Small Business Podcast: Right. I know you specialize in buying a business but let me flip around what if I'm interested in selling only because we talked about this topic last week. Is there a way for me to go my competitor and say hey are you interested in buying?
Richard Parker: Well certainly and I could tell you that I've sold a number of businesses and I do a significant amount of representation of sellers so I understand that side of equations well. Probably you know it helps me on the buy side but yes I would have a very similar approach. You know what you don't want to do is give the impression that you know we're having a fire sale.
Small Business Podcast: Right.
Richard Parker: But to call them up and say, "I'd like to get together with you," and explain it very clearly for whatever the reason - be honest. If business stinks and you want to get rid of the business selling your business is down you don't have the strength to do this anymore. If you were thinking of selling in five years and maybe you just want to accelerate that tell them that as well. You know you're starting to lean towards selling the business and you figured before you start packaging up the business, looking at business brokers or business attorneys - any professional, writing up profiles perhaps engaging professionals to start packaging up the business you thought that you know it may make sense to just look down the road at you know a competitor who maybe interested at building their business during acquisition. Just be very honest. I mean that's the key thing with all of this because both parties are going be leery of one another even if they're not staunch competitors and you know may have a professional respect for one another, both parties are [16:30 worried]. You don't want to tell them too much about your business or anything like that so again be very, very honest, very casual, no pressure and maybe we can regroup again or give me some time to think about it and we can get back together and sort of. The relationship has to build very and casually because you need to get to a level of trust before you can have any meaningful discussions.
Small Business Podcast: And in this economy are there times when it might make sense to indeed not buy out but merge in order to maybe save some costs and volume and that sort of thing.
Richard Parker: Absolutely. As long as you feel the personalities you can get together because in the small business the hardest thing to make compatible are two entrepreneurial individuals or two business owners who've been used to a, being the boss and b, doing certain things, certain ways for long periods of time. So mergers can make sense in smaller businesses as long as there's a clear definition of the roles of the individuals and you feel you can get along and you have to have a very, very clear mutual understanding of what you're going to do and what does the world look like on day one when we both own this company.
Small Business Podcast: Now we talked specifically about the companies that are like ours or competing against us are there times that we should consider maybe buying other businesses that are on sale that aren't in our industry.
Richard Parker: It makes a lot of sense to grow a business. I've had tremendous success adding ancillary businesses to my existing companies when I was buying and selling businesses where I would [find] the company that I could drop my products or services into their distribution pipeline or vice versa so there were ancillary products or complementary products and we could leverage you know the relationship to sell more products that either one of use were selling at that point and I think in those cases it always make sense regardless of the economy because its the quickest way to ramp up your business. So that's certainly a way to do it. What happens is the one thing that I'm not a big believer in is buying businesses that are completely unrelated that take you away from your current business and where you believe that you're going to just own this business, the management is going to run it successfully and you're going to just collect money every month from afar in small business. That works you know in big, big, companies. In small businesses where you need to be hands on it typically doesn't work that's why business is a very often owner operator. When you go up a couple of levels and you can get and pay for top notch management then it can work but in the smaller businesses it's very hard to be an absentee owner. It doesn't work most often.
Small Business Podcast: Right. Now as kind of our ending question, it's a huge one. We could do an entire interview just on this but is there a starting point from which I need to say as a business owner buying a business I want to try and shoot for getting them to take half of the money as an earn out so that I can make sure they stay you know continue to work to get profits I mean what's a good starting point there.
Richard Parker: It's perfect that we're having a very timely discussion for that answer. In today's economy given some of the uncertainty you must get a seller to finance the deal. But just besides the fact the banks aren't lending I mean you know I know over the years I've been teaching and preaching seller financing for nearly 20 years and never buy a business without it so especially now that banks arent lending. Seller financing is a critical component and almost to the point that you must be able to steal a business. It has to be a large part of the deal structure. Earn out performance clauses are critical and very much often take the guys of hey, I'll pay your price you have to accept my terms because there's so much now more involved that could impact the business significantly. There are very short period of time that the seller needs to be at risk along with the buyer. You may have some customer concentration issues. You know there could be issues that are completely unrelated to the everyday running of the business you know if you're in the transportation business and fuel spiked again I mean we're lucky it's come down now but it could go back up again and there's so many extraneous factors that you may not control directly then you add the specifics of the business again like customer concentration or for example hey, you have a great business it was running wonderfully for 10 years but say you've also been down for the last year. Yes, it maybe the economy but I need some assurances that that trend is not going to continue to perpetuity. So you have to have earned out a performance clauses in place categorically unless the business is flourishing.
Small Business Podcast: Well we've just scratched the surface here Richard but you've got obviously a great resource. For us to find out more how would somebody get in touch with you if they want to find out more information?
Richard Parker: The easiest way is to go our main website which is www.diomo.com. It's very easy to remember. It's the abbreviation for doing it on my own. D like David, I O M like Michael O.com, diomo.com and if anybody wants to send us any questions or enquiry the easiest way is just go right to the contact page and send that information. We're happy to answer anybody's questions. We have some great articles and information that people can access right on the site and I'm sure you'll find them quite useful.
Small Business Podcast: Alright listeners, well link to Richard's website in the show notes for today's interview as well. Richard thanks very much for your time today. I appreciate it.
Richard Parker: It's a pleasure talking to you.
