Thursday, November 28, 2013

Free Book Summary: How to Buy and Sell a Business By Garrett Sutton

This book is part of the Rich Dad Advisor family. This is a HOW TO: on Buying and Selling a Business. As part of the Rich Dad philosophy the goal is to create wealth. One excellent way to do that is through a business. Business's, by far have the most potential for wealth creation than any other means. Once your business is successful then you can hold your money in Real Estate. Garrett dives into more details and I will share my personal stories of success and ass chaffing's as well.Why is this important to me? As you may know, I ask this question as if I am sitting in your shoes. Am I investing my time in learning or burning 6 minutes on crap? So with that enlightening philosophy here is why this book is important.1. Businesses create wealth - Have you ever heard of Domino's Pizza? The original founder of that company was an orphan by the name of Tom Monahan. The legacy continues with Domino's being in every major country in the world. The amount of wealth and economic value created is vast.2. Businesses fail - You need to get educated on real world pitfalls because the odds are against you when you start a business from scratch. 90% of Businesses fail in the first 5 years and 90% of the 10% fail in the next 5 years. Without financial education, you will get your ass kicked.Why Buy a Business?

1. Cash Flow - A successful business generates monthly cash flow. As you know, cash flow is everything. Think about blood in your body. When it stops flowing, you die. The same holds true in business. Strong cash flow allows you to compound the business value and create more growth.2. OPM - There is nothing better than creating an infinite return. When you sell something for $100,000 and make a big profit that is great but when your customer sees a $500,000 savings from your offering that is even better.3. OPE /OPT- Usually when you start out in business, it is in the S - Quadrant of the cash flow quadrant. This means you have effectively created yourself a job. Where the real growth comes in is when you can recruit and lead people behind your cause. Once that happens then you learn to multiply your companies effectiveness because you are leveraging OPE & OPT (Other people's expertise and time)4. Tax Advantaged - With a business, you are able to generate income, pay all your expenses and then pay your taxes. The government sets it up this way because they know that business is the key to a successful economy. If you are an employee then you generate income, pay your taxes and then pay your expenses. There is at least a 30% difference in the two approaches. That is a big compound deal over time.As you can see, a business affords many benefits. I will highlight some of the tools that Garrett outlines in the book and then go off on a tangent and talk about different business ideas and why some businesses are much better than others.How to Buy and Sell a Business is packed with great information. This really is a HOW TO so I suggest you read it if you are buying or selling a company. For the sake of time, I will touch on three areas.1. Team- Your team and the depth of your bench will dictate your success. Do not be pennywise and pound foolish with stuff. You need a good CPA, Lawyer and coach. If you look at the best football teams, they have strength, endurance and tactical coaches for every position on the field. They have to work together to win the Super Bowl. The organization with the best TEAM will always achieve more than the one super star with an army of pawns. Think of TEAM as TOGETHER EVERYONE ACHIEVES MORE.2. Agreements- These are very important when buying and selling a business. Things like NDA's, Confidentiality and NON-COMPETITION agreements are critical in the evaluation stages of any business venture. Once a deal is in progress then you want to be familiar with Asset Purchase Agreements, Stock Buy Back agreements and Consulting Agreements. These all make a difference on how you structure the deal and affect taxes for both parties. Another detail you want when you BUY a business is a performance clause. I purchased a company and looked at the maintenance revenue and offered a fair price. Come to find out the person I was dealing with was not honest with the numbers. In the first three months, half the revenue was NOT realized and because I did NOT put a performance clause in the agreement, I received everything but the kiss. Needless to say I had to bust my ass to break even on the deal and then grow it.One bad deal like this can cause a ton of stress and problems so GET EDUCATED!!!!!! I rather have you learn from my mistakes instead of making them.3. Financials- These are a business's report card. You need to be able to read financial statements and dig into the areas and ask a TON of questions. This is important because financial shenanigans can be hidden really well in a pretty financial statement. Cases in point, Enron, Tyco, WorldCom and I.O.U.S.A!!!!There are different types of businesses and some are stronger than others. Warren Buffett is a big believer in easy businesses. He rather have a great business that can succeed with average management then a really hard business that needs a magician to make it work. This is why he invests in food companies like SEES Candy and Dairy Queen and NOT in car companies like GM. There are two differentiators here. One is moat which is competitive advantage and the other is capital investment. Every other year, car companies have to plow all their investment into the next car model. Dairy Queen simply needs to invest in more cash producing assets or give the money to their owners. If you are looking to go into business, spend some time on business types. I will profile more of these in future tutorials.Real World Examples1. If you hate paying too much for something then you will hate my two stories. There is an old saying in poker that if you don't know who the idiot at the table is then you are the idiot. Well in two cases, I really screwed up in purchasing businesses. The first business I purchased was 15 years ago (I am still paying it.) The mistakes I made here were several:1. I did not get a real valuation of the company.

2. I had no idea how to read financial statements.

3. There was a real estate component to the deal and I did not value that.

4. I was way too excited to get the deal done - emotional bliss can lead to intellectual bankruptcy.

5. I was the tuna negotiating with sharks. All of these things were my fault. My second fiasco was the deal I talked about earlier where I did not put a performance clause in the contract. This was a huge debacle. These were my two highlighted DUMB ASS moments. They were both MY FAULT!!!!2. I never like to end a review on a bad note so I will profile some good stuff. I purchased an IP (Intellectual Property) company for 10% of revenue. This is unheard of in the software world. This deal came out of the blue and the team we acquired is excellent. The lesson here is that if you are looking to buy a company, call on really large companies that are spinning off divisions. The best deals I have ever gotten are from big publicly traded companies that need to get assets off the books at the end of a quarter. I have done this twice and it is like buying dollars for $.10 cents. Think about it. If you have a company that does a billion dollars in revenue, do they care if they sell a company for $50,000 or $200,000? Not really, this does not even make a blip on their financial statements. If I can impart any advice, it would be to look for these types of opportunities. These can make you feel like a Magnificent Genius but real world business has a way of punching you right I the forehead so never keep your head in the clouds.There is a ton of great resources in Garrett's book. I recommend highly the Appendix sections if you are buying or selling your business. Another key differentiators as well would be to approach a big company. The amount of money you will pay or receive is night and day. If somebody wants me to buy their business, I am going to negotiate hard on the price but if they go to a large company, an extra zero means nothing to them. Keep this in mind.I hope you have found this short video summary useful. The key to any new idea is to work it into your daily routine until it becomes habit. Habits form in as little as 21 days. One thing you can take away from this book is ask questions. This is probably the best advice because the area the book covers generates questions. Also, trust your gut. If something seems to go to be true then it is.



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