the MacAngLyn journey: Canvassing for SMB Cache

TODAY’S ISSUE

🤑 SENSE - OR - SENSIBILITY?
🔎 Canvassing for SMB Cache - this week’s progress that you can copy
📈 Growth - our take-aways that you can use in your business buying journey
📚️ Resources - books, podcasts, etc. we are using to make us smarter

SENSE - OR - SENSIBILITY?

Prestige. Youth. Power. Soft, hugging leather seats. A car every man would love to own.  

Red Porsche Cayenne… This is the car that my husband bought this weekend.

My husband is in the car industry, and he sees literally hundreds to thousands of car opportunities every single week.  Before he buys any vehicle, he always comes to me, his partner, and talks through the deal. “Blessed is the man who walks not in the counsel of the wicked, nor stands in the way of sinners, nor sits in the seat of scoffers, but his delight is in the law of the LORD, and on this law he meditates day and night.” (Psalm 1:1-2) 

I’m a tough one when it comes to evaluating cars because I don’t fall easily. In fact, I steer away from prestigious looking cars for reasons like to not separate myself from others and to be able to drive through less fortunate areas without sticking out and to feel safe. I also prefer cars that get good gas mileage and leave less of a footprint on the environment. 

Most importantly, a car decision is about practicality and financial sense. 

At first glance, this deal seems all about vanity. Sure, there is an element of that to this story; owning something nice that everyone else wants, but I didn’t say yes for that reason.

Before buying this sweet, sexy little thing, he was driving demos.  At the end of the day, there is a cost to driving demos, taxes.  If no business miles are accrued in a period, then the full tax is due.  With his current role, he does not travel; therefore, business miles are few and far between.

To purchase the Porsche, the financial story had to make sense.  Turns out, the payment for this vehicle is less than the taxes are for a demo, so poof, my husband got his wish… one that he truly deserves for being one of the hardest working people I know.  I’m so glad the financials worked out, for his sake.

To buy a business, the same rules apply… financials are king when it comes to evaluation; the story has to make sense.  Of course, a lot more items are to be considered when buying a business than when considering the purchase of a car, but the same principle of objectivity applies.

Start with your dealbox questions:
📦️ Is this business in the [fill in the blank] industry?
📦️ Is this business in the [fill in the blank] location?
📦️ Does this business have [fill in the blank] revenue?
📦️ Does this business have [fill in the blank] seller’s discretionary earnings (SDE) / profit?

💰️ Profit?  Does the thing make money?
What is the profit? Look at the Revenue or in simple terms, How Much the Business Made.  Then, subtract the total of what it cost to make that money.  What is left over after all expenses are paid?  That is what you make. Don’t forget that you have to pay taxes on what is left over.

How much are they making; what is the percent of profit?  Is it like 10% (pretty low) or 50% (pretty high)?  You should find out an approximation for the industry you are evaluating, so you can make a good comparison.  If pretty high, go forward; if low, move on. 

🥗 Operator Salary?
Does everyone who works for this business get a salary? Are salaries for all employees accounted for in the expenses? This cost includes the person running it, meaning the owner’s salary.  

A lot of times, small business owners don’t pay themselves to run the business, so this expense is not accounted for in the financials.  The owner is just taking whatever is leftover.  Kindof like not getting paid to do the work… taking, not even pulling, the short stick….

If the answer is that the owner is doing work but not being paid a salary, it means that the cost to do their job to run the business is not in the budget.  The next question to ask is does the profit support another salary for someone else to do that job going forward? If yes, then go forward, if no, move on.

🌊 Cash Flow?
Consistency of revenue or the money the business makes… Is it cyclical, like the planting/growing or travel industries, or is it consistent?  Are there any large fluctuations in the revenue? 

A lot of people just like to have jobs, a consistent paycheck, so they can pay their mortgage and phone bills, etc. ontime.  Businesses are no different.  They need to earn consistently to pay the bills ontime.

Does it look like they can sustain their current revenue?  Is there some dependability for future revenue? If there are cycles in the cash flow, you really need to find out if the business can sustain paying the bills during the downtime.

If there are inconsistencies in revenue, find out why and if it might happen again.  If sustainability for the future is there in the cash flow, then go forward.  If not, move on.

Here are a couple of positive take-aways:

1. Sense or Sensibility? - Choose Sense

2. Narrow Your Search - “The problem - when you cast your net that wide - is you inevitably catch something you don’t want to catch.” - Edward Felten

3. Cash Flow - Pay attention to cash when the cash is coming in.

CANVASSING FOR SMB CACHE

Activities we accomplished this week.
🧑‍🏫 2 Learning Events with Unconventional Acquisitions
👴 1 Set appointment with SMB Accountant

GROWTH

Deal Flow Strategy

😀 Found a Team in Our Contrarian Thinking Group with a Good Outreach Strategy & Asked for a Copy of Their Processes

🧑‍🏭 Narrowed Industry Down to One for Now.  This way,we have a better chance at becoming experts in this space, to better understand the industry: Childcare in Northwest Houston Area (so if you know anyone who owns a daycare / preschool in that area, send me a message)

📃 Researched Basics on Industry: Licensing Requirements, Average Cost per Client, Profit Margins

RESOURCES

Resources that can help you learn about small and medium business (SMB) buying:

1. Kurtis Hanni, a CFO for SMBs for 11 years, is a great resource for learning about financials!  He spoke recently on a Contrarian Thinking call to teach the difference between Cash and Accrual Accounting. Here is a link to his X page.

2. Here is a link to the podcast Deal Diary which is produced by Ella and Chiara who are learning how to buy small and medium sized businesses, just like us.