This week, we finish up an interview with entrepreneur Daniel Lee, regarding how he approached a business owner to purchase an exteriors company and how he transitioned into leadership there. From understanding financials to knowing how to approach a business owner, he is a wealth of knowledge for anyone that is looking to buy a business in the future. If you haven’t listened to part 1, make sure to snag that episode as well!
Welcome to Business Talk Sister Bekkah. I’m Bekkah! And I’m Ruthie! And this week we are doing part two of “How to Buy an Established Business with Daniel Lee! If you missed last week’s episode you need to go back and listen to it especially the ending he talked about even how he delivered a child! But he has gone through the process of purchasing a business after being in Corporate America and we’re super excited to pick this conversation back up! Thanks so much for being here with us today!
Daniel: Absolutely! I’ve had a great time!
How to Talk With a Business Owner About Buying The Business
Bekkah: Our first question this week is how did you go about talking with the business owner when you were matched? You went to the broker and now you’ve found something that you potentially are interested in.
Daniel: That’s great. Last week I mentioned this book by Walker Dybal called “Buy
Then Build” and this is the second most important piece of advice that I received. It is “behave like you are interviewing for a job. The business owner needs to want to sell the business to you and like you for a few things because it just makes the transaction a little bit easier.”
The first thing started with the phone call. The business broker, myself, and the business owner. I asked him just things like, “What are you most proud of? What do you think you will miss about this business?” and I think others might find the temptation to like be a little bit more skeptical about, “What’s he hiding? Why does he want to sell?”
This particular gentleman, his son was part of the business, he didn’t want to buy the business. Someone from the outside could think, “Oh, you know what are they hiding?” and really come with that kind of an inquisition and so I just took a totally different approach like I was interviewing for a job at this company.
I was intrigued in trying to understand what this person was passionate about and he was passionate about the culture. Very passionate about the way that they go about doing business is what differentiates them and then what I found really quickly is that those values were the same values that I had and it really became natural.
We ended up really setting the business broker off to the side and he and I just you know ran the race together. Mind you this is March 2020 days before the country shut down.
Ruthie: Okay.
Daniel: I wrote a little article on Linkedin that says, “How I Bought a Business in the middle -” or something like, “So I quit my job in the middle of a pandemic and bought a business.
Bekkah: Little did you know that the home exteriors would just explode during that time.
Daniel: EXPLODE! I talk about that all the time. We are sitting in different rooms. We’ve got you know budgets – I don’t want to overlook there are a lot of people out there with very difficult circumstances and there have been layoffs and things but I think the market that we serve is really doing pretty well and they’re using their home differently.
The budget is different. Folks aren’t going to Disney World. The child care budget is a little different with kids staying home all last year. They’ve been sinking that in to their homes. Not to mention home values have been incredible so that was a little stroke of luck.
Ruthie: Okay. What did you need to know before considering putting in an offer? You talked with him and everything but what did you kind of have to have in writing and what made you feel comfortable to move forward? You kind of talked a little bit about that but more logistically.
What Is a Letter of Intent When Purchasing a Business?
Daniel: Yeah here’s the biggest, I think the scariest thing or that’s not out there. There’s something called a “letter of intent”. That’s what you would call your offer. The letter of intent is just a sketch out of what we want the terms to look like and there’s nothing really binding in it other than a few factors.
There’s an exclusivity – you’re only working with me. There’s a non-disclosure – he won’t talk about the offer with anybody. I won’t talk that he’s selling it with anybody, but the numbers are very loose. In my situation, this business had been up for sale, and at the 11th hour literally a week before closing it fell through because of the buyer.
What To Do Before Submitting an Offer to Buy a Business
When I walked into the business broker this thing really had just fallen through and he picks it up off the floor and says, “Hey! This isn’t out there yet but take a look at this.” What you need to know before considering putting in the offer, for me, the number one thing is, “Is there a role? Can I add value?”I remember just really burned in my brain there is a gentleman that started a coffee company here called the Roasterie his name’s Danny O’Niell and he went to Rockers where I did my MBA and they did a little talk and people asked him, “Were you just so passionate about coffee?” And he’s like, “No, no. It’s not the product that I’m passionate about. It’s about creating something that I’m passionate about.”
1. Always Make Sure There is a Role for You
I wanted to make sure there was a role. I’m not a window installer. I can’t install the window so I need to know that there’s an operational general manager role that I wanted that I could play. That was first and foremost. The second thing – what happens? Are there processes in place to continue to have sales? This gentleman had started this company 20 years ago and what’s kind of interesting about windows – to do a whole home it’s really expensive so people end up doing two, three, four the ones that they need done and so it creates reoccurring revenue.
2. Find Out If There are Processes in Place to Keep Making Money
There’s an established sales process just like what I was looking for in my target statement. Once it met all those criterias only then did I start looking at the financials. You sign the NDA you get three to five years of financials and you can run some models to see “does the business throw off enough profit that you can successfully repay your debt or if you have shareholders or however you want to do it some sort of return on investment with a cushion.”
Create some tests to understand, “Alright. If business slumps 30% – what happens? Where do I get in trouble? The other thing for me, personally, is business owners can run a lot of personal expenses. Maybe kind of in a gray area through the financials and it was important that you strip some of those out.
3. Evaluate How Clean the Financials Are
What I really liked about this business is I felt like he ran it like a business not as a tax shelter. Which you know you can run some expenses through a business that are really more personal expenses. I felt that – the word I’m looking for – I felt like the financials were clean and simple.
When I realized there was a role for me to play, it had some sustainability, and that the financials were clean, I felt it was time to put in an offer. We had gotten to a relationship that was close enough we were talking every week one to one that he just told me what the business was for sale at. We just went with his number that he had previously agreed upon. You could have picked at it, “Hey, it’s during Covid. Your revenue’s down. The multiple’s off,” but I was really buying a machine.
Think about it as a car. The car runs and it’s up to me to get in that car fine-tune it and drive it faster. The price you know 10, 15% really wasn’t that important to me.I felt like I could get in there and I could improve upon the operational efficiency and make this thing run a little bit faster.
How to Transition Employees During a Business Acquisition
Ruthie: Okay so you purchased this business. You really liked the guy that you went with and the company that you went with and met all these criteria. Now talk to us a little bit about how you transitioned into that role of leadership? How did you help ease your employees now “surprise employees” – maybe not “surprised.” Maybe they knew, but how did you ease into that with gaining their trust and whatnot?
Daniel: So first thing, I spoke with the owner and I said, “Hey! I’d like to have – how do you think this should go down?” Because he’d worked with several of these employees 10 plus years. They’ve been around a very long time and the part of our asset purchase agreement, APA, was he was going to stick around in a sales role for 30 days and then provide some consulting for the next 60 days. So there was a time when we were both there.
We sat down and sketched out “what are your duties? What are my duties? Who comes where when?” So he wanted to divulge the news to our two project leaders first. So I met with the project leaders and then after that another guy and then after that the entire staff and just shared with them a little bit about who I was. What the heck was this guy doing jumping from an insurance business into a window and door business? What does he know?
I started that conversation with kind of high-priority people that you need to have buy-in. Tell them about myself, ask them about themselves, and then a follow-up meeting to talk about, “Alright, here’s who you go for this question.” For example, “What project are we working on each day?” The prior owner kept that and then I eventually transitioned into that. Expense questions, things like that. We tried to answer what questions would be on their mind and how it would impact them. Then, eventually, you saw it started out as a lot of the prior owner, a little of Daniel.
You kind of call that 90 – 10 and we just whittled that down until I was in it 100%. The way we structured the deal is the son was kind of the operational mind behind the business and he stuck around for six months so he could keep the business running while I learned the front end. The owner stuck around for up to three months, 90 days, and to help me learn the front and the business. You can just tell that they were very invested in seeing this thing succeed and just with the next chapter of ownership. The transition worked out much like that and so far you know it’s very successful.
How Long Should You Wait to Change Things After Purchasing a Business?
Bekkah: Yeah, how soon do you change things when you’re purchasing a business? How long is that time frame where you actually start going, “Okay, now I want to improve these things”?
Daniel: Yes. That’s a great question and I got that exact question for especially when I was one-to-one with some of these employees, “what are you gonna change?” They were really concerned about what the business focuses on and differentiates them in the industry against the average and they really had a sense of pride in that. I assured them that what they do well, what this company does well, is what attracts me to purchase this business.
The changes that they’re going to see I don’t know all of them yet they’re probably going to be operational. There’s going to be a different style of doing things. I am going to try to grow the business. The owner left the business at 62 – 63 after starting 20 years ago! That’s a lot of effort! Whereas, I come in with a lot of energy ready to grow it so what you’re going to see change-wise, you’re going to see from trying to grow. Probably the first 30 days.
I mean there are little things. Payroll system, there was a manual payroll system. Probably 90 days, I started to implement some inventory checklists. Just recently, we’re six months in, we’re on several paychecks of entering your time on your phone instead of a paper page paycheck time card. Things like that. I would say you know I tried to phase it in every 30 days or so, but I didn’t do much change at all in the first 30 days while people were trying to get to know me.
One of the things that I think I’ve heard as feedback is as a new owner, white-collar guy, you know I haven’t done a day of “real work” in my life I spent time out in the field with them learning what they’re doing. I stepped out on a scaffold one day just to see what it was like to be out on a scaffold and it freaked them out. Like, “What are you doing out here?” and it’s, “Well, I’m asking you to get out here three stories high. I mean I gotta know what it’s like.”
Trying to understand them at the level where they’re at I think is really beneficial. I think that’s just a leadership lesson. That doesn’t have anything to do with this particular role but I was really sensitive to that. I was always in a knowledge base environment where this is a more hands-on produce something environment so I’m stepping into something, at least from the outside looking in, that I have no idea. I, personally, would simplify it to say, “Look. It’s just people working together to produce an outcome. I know a lot about that.”
How to Managing Employees Who Have More Experience Than You Do
Ruthie: Okay, so how did you navigate like – you’re out there on the scaffold clearly people know more than you, how did you kind of navigate that almost like a power vacuum in dealing with people who have more experience in the industry than you do ?
Daniel: That I think is a lesson you learn as a leader in you don’t need to be the person with the most knowledge. Perhaps, you need to be a person who can analyze – As we talked about in our last podcast, my strength is strategic. I can take a bunch of information, synthesize it, ask some good questions, and maybe you come up with an idea. I’ve never felt like I needed to have all of the power or the information. I’m always asking questions.
“How would you guys do this? What happens here?” And it’s taken me a long time and they’ve been very patient to repeat the process over and over. I’m sure I’ve asked the same questions and I usually preface it, “Hey! can I ask a dumb question.”You know, I have a joke especially when I speak in public about we all know there really are dumb questions even though people say that. There’s no dumb questions.
We all know there are really dumb questions. Just ask them anyway because somebody else has got the same dumb question. It’s just the flip side of trying to make people approachable and I just opened, “Hey! Can I ask you a dumb question? I know I’ve asked this nine times.” As long as I’m willing to learn what they do, then people just have been very, very gracious I feel like even in my prior role whether it was the same situation.
I would lead a claims organization where we’re taking a two million dollar case to trial. I’m responsible for the department but I don’t know anything about the motions and the people that are handling the nitty-gritty technical details but spending time to learn and care and help people know that their job is important.
How to Discern If a Business Is a Good Fit to Aquire
Bekkah: Yeah, so I have a question I think that you have a lot of discernment and when you’re talking about asking dumb questions whatever but when somebody maybe doesn’t have a lot of experience in evaluating this kind of things or maybe hasn’t done as much research as you have how does a person know to evaluate the integrity of the business owner who is selling? What impacts your decision process in that and figuring out if it’s going to be a good fit? Because I foresee that being an issue for some people when they have that letter of intent and all of that.
Daniel: Yeah, so I guess maybe what I would say – so I’ve had the great opportunity of having 15 years of corporate experience, great mentors, a sandbox to try things, if you were doing this in a little bit earlier in your career then the number one thing I would encourage you to look for is consistency. There’s a book called “The Leadership Challenge” by Kouzes and Posner and I’ll always remember they use the acronym, “Do what you say you will do,” so “D-W-Y-D – something.”
Look for the congruence of a person’s rhetoric and their action. What does the person say? What does the business owner say? What does the business look like? I looked at all of his reviews online. What are they saying about you? What’s the public saying about him? So I’m looking at that and then I’m trying to evaluate the same thing in the financials. Does what he says is valuable is exactly what comes across?
You don’t really get a chance to talk to the employee. I didn’t talk to employees until about a week before. Until we felt the sale was certain. And that’s going to be pretty normal for a small business in my understanding. You’re not going to get to kick the tires and evaluate it, but there’s a lot of other subtle things that you can see to determine is this person’s what they say is congruent with their actions? That’s what led me to develop a sense of trust.
When Is The Best Time in Life to Buy a Business?
Ruthie: Okay, so you’re coming at this with 15 years of experience and you’re more established in your career and as an adult, honestly, and all the things that you’ve done. What would be the perfect time to start looking for a business to buy whether that’s in relation to age or experience or interest or whatever? What would be the perfect time for someone to start looking into that?
Daniel: Well, I guess what I would say from the advice is once you understand where you want your end to be, and if a business is the vehicle to get you to that end, then it’s time. That could be at 22 that could be at 40. The flip side of me being established, I have learned to live on a corporate salary and my life is structured around that. There’s much less risk that I could take.
If I’m 22 without dependence, without a mortgage, without all these other things that you build up in your life after a course of 15 years, there’s more room to take a risk. I was able to experiment, have successes and failures in Corporate America, if a person wanted to do this at 22, you just take you just have success and failures at the same point in time and you might just start smaller and less risky I guess so to speak. What happens if it fails how do you reinvent yourself if you get knocked down when you’re 23 – Gosh!
There’s just a lot of time to go forward! I feel like as you’re younger there’s a higher margin of error. Think about your 401k. When you’re in your 20s you’re in a really risky portfolio, but as you move up into your 50s you’re in a less risky so I felt like – and that’s what attracted me to an established business because it already throws off a salary. I really didn’t have the opportunity for it to fail at all but the flip side of that if I go for a little safer business, less of an upside.
I could not have gone for a little tech startup whereas if I was earlier in my career, I could take some of those risks. The question about the age – I don’t know if it’s the age. I think you have to define what you want. What do I want my life to be like? What is success in my life and what car do I need to get in to get me to that point? That might be a corporate job, that might be start your own business from scratch, that might be buy a business, that might be a volunteer for my whole life. But I think it would be different for everybody.
Buying a Business: What I Would Have Changed
Bekkah: Yeah, so if you were to do this again what would you have done differently?
Daniel: Oh, gosh. One of the realizations that I had when I was in my sales job talking to small agencies and other businesses. I was like, “What’s the difference between me and them?” I talked to this lady that started her own business and I was like, “Gosh! Why can’t I do something like that? I’ve got all this training. I got all this good stuff here!”
There are certain things that I could point out that maybe the business could do better so I feel like what people that have gone before me had, they either had the confidence in themselves to take the risk on themselves, the belief in themselves, so I think I would have – I mean I’m not sure how I would have done it but I would have liked to have done it earlier.
Not drastically earlier, but maybe several years earlier and just had the confidence that a business owner is just a regular person out there hustling trying to make things work, so probably do it over might try to do a little bit earlier then. I think I bought it when I was 41. Just after 41, my birthday is in August. Perhaps sometime between 35 and 40 to allow myself to build up. I still had a good set of training.
What Tools and Resources Are Valuable For Buying a Business?
Ruthie: Okay! What tools and resources would you recommend checking out for someone who wants to prepare to purchase an existing business?
Daniel: So, definitely that “Buy Then Build” book without question. I think that is a really good piece of in some – if you could fault like an instruction manual. There’s another great book out there I don’t remember it but it’s a Harvard Business Review book if you search for “How to Buy a Business: Harvard Business Review” it’ll talk about that.
Those two things are really important on the technical elements of where do you go and find it and in the Harvard Business Review book there are some really interesting strategies like creating a search fund, going to get investors, if you have a business plan you go start talking to investors and they will start to back you. I’ve heard people say it, but there’s no shortage of capital out there. They’re just shortages of great ideas and people willing to go chase them. If you can you can find that idea or find exactly what you want if you’re willing to put in the effort there is capital out there to help you do it.
Bekkah: Wow! Well, thank you so much for being here with us today. We have really enjoyed our conversation with you!
Ruthie: If you guys missed the last episode we talked about how Daniel sounds a lot like Tom Hanks –
Bekkah: That’s what I think anyway.
Daniel: We should have a vote, you know! We should! How many people think he sounds like Tom Hanks?
Ruthie: We’ll make a poll.
Daniel: How many people think he just sounds dumb?
Ruthie: Those will be the two options.
Daniel: Yeah!
Ruthie: But we are yeah just really thankful to have listened to your knowledge and there was just like so much that was really applicable to like you kept saying like this is not so much just a purchasing business thing. This is a leadership thing. This is a management thing. This is a whatever and I thought that was really cool.
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