My Biggest Regret As an Entrepreneur: Buying the Wrong Business

Shine Star

No one tells you what can go wrong when you buy the wrong business — until it’s too late.  I’m sharing my story not for sympathy, but to warn other entrepreneurs who are walking into deals blind.  Here’s what I’d do differently if I could go back.   #StartupRegrets  #BusinessAdvice  #EntrepreneurJourney  #LessonLearned  #BeforeYouBuy   💡 Learn from my mistakes — hit play and protect your future.

Transcript

00:0075 that's the percentage of small businesses that fail. I want to help you

00:03avoid all the pain that is the failure of businesses. I learned the hard way. I

00:09lost 50,000 in my first deal. I lost 75,000 in another deal. Now I have many

00:15businesses making millions of dollars a year. But what changed? I started buying

00:19businesses instead of starting businesses. What do you wish you knew

00:22before you started investing and doing deals? We're gonna try to answer that

00:26today. The most important thanks for all of you. Action. Line. First thing is you

00:31got to keep your day job. I kept my day job for just about 10 years before I

00:35finally left. If this is your first deal do me a favor. You can invest, do deals, but

00:39also keep your salary. Your salary is like a lifeline to oxygen above water until

00:43you learn to swim by yourself. Keep it until you're sure you really know what

00:47you've gotten yourself into. That is unless you have one of the big three, which I

00:50consider cash to cover any downside, inside knowledge on the business having

00:53done it before, aka you're an accountant, you buy an accounting firm. Or three

00:57investors like CYA. This one's so important. Partners. You gotta proceed

01:01with caution. Imagine every partner you have is gonna leave you. Data says about

01:0570% of our partnerships fail. Our generation stays at a business or a job

01:09for three years on average. So that new co-founder that you have, it's likely they

01:14won't be the person that you grow old with. I didn't have a lot of rules for

01:17partners when I started. Now I do. No partners get equity up front without cash in

01:21the game. Never give away equity without a vesting schedule. They need to

01:24do the deal with you, put in the same amount of cash as you, and they need to

01:27still vest so they can't walk away leaving you stuck with the bag. Second

01:31is no 50-50 partner. Someone needs to be in control and it's probably you. Or

01:35whoever has the most skin in the game. You also need to make sure you have a

01:37partnership agreement. Something like this. With clear deliverables on both sides and

01:42a pre-exit provision if it doesn't work out. Think of it like writing a prenup before

01:46you get married. Let me tell you a little story. I did a deal. I didn't vet the

01:49partner very well. I got all excited and I wanted to start straight away. But I

01:52didn't think about the fact that the best predictor for future behavior is

01:54past behavior. And this particular dude had a behavior of being like super

01:59mediocre. Not trying very hard. Getting fired from companies. It being other

02:02people's fault. Reaching middle age. Not having much to show. Victim to every

02:07circumstance. The way that things start is the best they'll ever be. They will

02:10likely never get better than that first date. If it doesn't happen up front will

02:15only get more painful on the back end. So you can either have an awful

02:17conversation early or you can have an unbelievably uncomfortable

02:21conversation later on. What ended up happening to me? I ended up writing a big

02:24check to get this guy out of the company to get the negative energy away and to

02:29focus on being victors not victims. I could have saved myself a lot of zeros

02:32from paying attention to this point right here. I got to go grab something. I'm gonna

02:37exit the car but you guys need to have an exit plan in your business. What does that

02:41mean? What if you get tired of this thing? Can you sell it? How long is it gonna take? Who are you

02:45gonna sell it too? If you start with the outcome you want it's much easier to get

02:50there with your GPS. I kind of think about it like a game of Candyland. You

02:53guys remember that game? You figure out on the roadmap the entire point of the

02:57journey is get to the end of the map. This is your game with buying a

02:59business. At some point the business that you do today probably won't be the

03:02one you want to do in ten years. So figure out how to get out of it ahead of

03:06time. You don't want to buy a job that you hate. This type of business? A lot of

03:12work. You can see them and they're working all day. It's specialty. You need

03:16skilled labor. Now a business like a dry cleaners, although I don't love them, less

03:20work. You could hire lower skilled labor to do the work next to you. But don't you

03:23see the alterations handling behind me? Also more skilled labor. You want to make

03:27sure that the business you buy is not just you trading one job you don't like to

03:31work for for a business that you can't escape from that is still a job. This is

03:36the number one thing I see people do wrong. Separate is you can start with a

03:40business like this that you don't have to be the operator of something like a

03:44postal shop. You could actually have somebody else run for you. But don't buy

03:48a job you hate because it turns out you can't leave a business like you can leave

03:52a job. But this one I'm going to see if they might be interested in selling. Hi, do you

03:58have an Instagram? Give you guys a little love. All right. I know I said don't tell

04:03but actually you shouldn't keep your deals a secret. You want the deals to

04:06get beat up. That way you know if they're actually good or not. Also this place is

04:11cool. Quinn's owned it for 25 years. How awesome is that? Maybe you should come

04:15check out Point Loma if you need to do some shipping. How long do deals take to do?

04:19There's something called the 3-6-12 framework. Basically you need at least three

04:25months to learn about dealmaking, how to do a deal. Then you need six months to

04:30actually close the deal. Then you need 12 months after you've bought the

04:34business to integrate the business. That means make sure you actually know how to

04:37run the thing. Most people get into trouble because they try to expedite any

04:42of one of those three steps. And when you do that you end up f***ing up all the work

04:47you've done previously. So get really tight on realizing that good things take time. The

04:52people that try to rush are often the people who caught up and get rich quick schemes and

04:57the only things that those things help with is helping you lose money fast.

05:00Franchises. Let's check out the competition. I don't like to own these things. I like to

05:04know what they're up to. Love them. Hate them. Really depends. This one's interesting. It's

05:09in a tiny little box but you can see the build out cost. It's fancy. You got to get

05:13all of their particulars. So I'm really careful about making sure that the franchises that

05:17people use and buy have expenses that make sense. Otherwise you're shelling out

05:22money left and right before you even make a dollar. It's why I typically like to buy

05:26not build. So be careful and choose your franchise wisely. If you're gonna buy a

05:32business you need niche expertise. Sector specific experts that understand

05:36your business. My friend Zach bought a gym. A CrossFit gym to be precise. And the

05:41reason he got comfortable buying it is because he paired up with one of the

05:44trainers that knew the ins and outs of the business who had also managed the joint. So

05:47don't just buy a business all by yourself with no expertise. Make sure you

05:52find yourself a little who not always how. Let me tell you why you want to have a

05:56who not always just how. Because the next rule is we don't buy turnarounds. You're

06:02not a pro so we don't do pro level things yet in business buying. I think about it

06:06like nice house on a nice block we just let the asset appreciate. We don't buy the

06:11shitty house that we have to completely redo on the block and try to become an

06:14expert in fixing the kitchen right away. Derelict businesses or turnarounds are

06:19hard. They're super hard and you are just easing your little tootsies into this

06:23game of business buying. So make sure it's profitable when you buy it. I've got some

06:28more lessons I actually thought we'd talk about when it comes to what I wish I

06:31knew when I was buying my first business and what not to do. No deals that you

06:36could lose more than 20% of your net worth on. That's my number. These days those

06:42numbers are maybe more like 5% I might be able to lose a hundred thousand or a

06:46million bucks and be okay. Not like bragging just to say the truth but in

06:50the beginning I wouldn't have been fine losing a thousand ten thousand fifty

06:53thousand. So know what your ten to twenty percent number is and that's gonna tell

06:56you should I do this deal or not. Be really careful with SBA loans. This is

07:00some 202 Warren Buffett level shit but remember these words. It's controversial.

07:04I would never want to do a personally guaranteed loan on my first deals.

07:07Personal guarantee means if you get a loan from somebody else like the SBA the small

07:12business administration you get some sort of cash from them but they get access

07:17to your assets. So break this down. I owe you. Hi bank please give me ten thousand

07:22dollars. Great I will give you ten thousand dollars. You now need to pay me

07:26back that ten thousand dollars but your business is failing so you can't. No money

07:30for you. So what happens? The bank says ah you have a nice house that's worth more

07:34than ten thousand dollars. I'm gonna take your house pay back that ten thousand

07:38dollars. You don't have a house oh I'll take your car. This is a this is a car. If you

07:42don't have a car they will come after anything that you own and this will be

07:46you sad at the end. This is the weight of loans and debt done poorly. So make

07:51sure that you understand if you actually want to take that risk. Ah this one is so

07:55good. It's called downside scenario planning. What if the worst thing happens

07:59to your business this year? Are you still profitable? If not we pass. Look at this

08:03spreadsheet right here. This is so good and you should use it for every single one

08:08of your deals. Actually if you click the link below we'll give you this spreadsheet

08:11for free.

08:1299. Basically what this does is you're looking at a model that says if we make

08:16a hundred thousand dollars this year right now and we lose seventy five fifty

08:20percent twenty percent of our total revenue or profit what happens? How much

08:23runway do we have left in the business? How much money do we still make? Can I

08:27still cover the debt that I used to buy the business? This downside calculator has

08:31saved me many times from getting into a business and realizing oh my god I'm one lost

08:35sale away from bankrupt. No one out. Mitigate go to zero risk which basically

08:40means you ask yourself the question could this business go to zero and then you

08:43create a plan for what to do if that happens. So let's say you buy a property

08:47management company with 30 clients and 20 of them are owned by one group. So you

08:52could lose 20 clients overnight. What could you do to still buy the business?

08:55Decrease the price of the business by those total customers for two years and

09:00hold that in escrow somewhere meaning the bank holds it until the deal goes

09:04through and you've kept those clients for that period of time and recouped your

09:07cost. There's tons of ways to mess with businesses but basically you want to ask

09:11yourself how could this business go to zero and how could I protect myself from

09:14it? Don't fall in love with any businesses or any deals. My dad always said

09:19never fall in love with something that can't love you back. Really important that

09:22you remember that there's so many deals that you could swim in them. It's the

09:26kiss of death that you get too far down the road with a deal and you have sunk

09:30cost fallacy which means because you spent a bunch of time and cash on it you

09:34think that you still need to do this deal you fall in love with the deal. Let

09:37me show you what this looks like. You're about to close. The seller knows that so

09:40right before you go to close he says I need a little bit more cash or I can't

09:44give you enough financing. These tiny paper cuts they bleed you out so hold the

09:48line. Too many deals to fall in love with one. This is super technical but in

09:52every deal you do you need to find the one thing that could kill you. One of the

09:55biggest deals I've seen go sideways was largely because of one thing that was

09:59the assets that they had the expensive stuff that started to fail or break. In

10:03this instance it was trucks. So it's really normal pre-sale for people to

10:07band-aid equipments. That means that the repairs don't come out of their P&L

10:12before they sell or their show on their balance sheet. It looks to you like

10:15they've got a fleet of great trucks to use but behind the scenes they're a bunch

10:18of lemons. You need to get a third party to value their assets. It's really easy you

10:22can Google search third-party valuation experts but make sure you do it.

10:26Let's say you're like me and you don't want to take all that risk on. You

10:29want to diversify your risk. You want to like spread it out across a bunch of

10:32people. There's a lot of ways that you can do that. You can get seller financing.

10:35You can raise from investors. You can use multiple loans and you can actually learn

10:39how to do this here for free. You can use this small business calculator. You can do

10:42deals that help other people grow just by you sourcing the deals to them.

10:47Typically for me I want 12 months of emergency fund cash to make sure if

10:52anything goes sideways I'm a-okay. Speaking of seller financing I like it.

10:55What does it mean? Let's explain it in one single sheet of paper because that's all

10:59I have left. Owner of a small business has money in the form of profits they make

11:03each year. They want to sell the business. You don't have money. You need money to buy

11:08this business. In order for you to buy this business the owner gives you money

11:14then as you make money over the course of each year you pay out the owner from the

11:19profits. It's a little triangle like this. Business owner gives the cash from its

11:25business to you for you to purchase the small business and as the small business

11:29profits more you give it back to the owner. The benefit of this is that you

11:32don't always have to have a personal guarantee which is good. I don't know if

11:35you guys are ready for that like next level thing but revenue and profit share

11:39deals are those. We should probably do a whole video on this. It's basically where you

11:44learn how to buy a business with your sweat or expertise. I'm not gonna break the

11:48whole thing down. Drop it in the comments if you want me to break down a sweat

11:51equity or a rev or profit share deal because I got you fam. Okay the thing

11:56is small business owners lie to you all the time. So one having an accurate way

11:59to review the financials of a business super important. You can use a tax

12:03accountant to do that and also once you become the owner of the business you

12:06can lie to yourself too. So I use things like this to track my business every

12:11single week and see where it's going. This is called a financial scorecard. It's

12:14fancy it sounds kind of boring maybe people would go rather watch Netflix and

12:18understand this but if you understand things like scorecards that's how money

12:21gets accumulated because money is like a mistress. If you don't pay attention to

12:24her somebody else will. Remember entrepreneurship is hard. You'll lose

12:29money and time and sleep get stolen from and sued but working a nine-to-five is

12:34hard. You'll be underpaid, not promoted, under challenged, hate bosses, all of it is hard.

12:39So you get to choose your heart.

12:43So you get to choose your heart.

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