This book is part of the Rich Dad Advisor family. This is a HOWTO: on buying and selling a business. As part of the Rich Dad philosophy, the goal is to create wealth. A great way to do this is through a business. Business by far has the greatest potential for wealth creation of any other medium. Once your business is successful, you can keep your money in Real Estate. Garrett dives into more detail and I’ll share my personal success stories as well as my scrapes.
Why is this important to me? As you know, I am asking this question as if I were sitting in your place. Am I investing my time in learning or burning 6 minutes on garbage? So with that illuminating philosophy here is why this book matters.
1. Businesses create wealth. Have you ever heard of Domino’s Pizza? The original founder of that company was an orphan named Tom Monahan. The legacy continues with Domino’s presence in every major country in the world. The amount of wealth and economic value created is enormous.
2. Businesses Fail: You need to educate yourself about the pitfalls of the real world because the odds are stacked against you when you start a business from scratch. 90% of businesses fail in the first 5 years and 90% of 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 of the blood in your body. When it stops flowing, you die. The same is true in business. Strong cash flow allows you to increase 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’s great, but when your customer sees a $500,000 savings from your offer, that’s even better.
3. OPE/OPT – Typically when you start out in business, you are in the S quadrant of the cash flow quadrant. This means that you have effectively created a job for yourself. Where true growth comes in is when you can recruit and lead people behind your cause. Once that happens, you learn to multiply the effectiveness of your company because you are leveraging OPE and OPT (other people’s time and experience).
4. Tax benefits: With a business, you can generate income, pay all your expenses, and then pay your taxes. The government sets it this way because it knows 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’s a big problem compounded over time.
As you can see, a business offers many benefits. I’ll highlight some of the tools Garrett describes in the book and then go off on a tangent and talk about different business ideas and why some companies are so 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 business. For reasons of time, I will refer to three areas.
1. Team – Your team and the depth of your bench will determine your success. Don’t be stingy and don’t mess with things. You need a good CPA, lawyer and trainer. If you look at the best soccer teams, they have strength, stamina, 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 a superstar with an army of pawns. Think of TEAM as TOGETHER WE ALL ACHIEVE MORE.
2. Agreements: These are very important when buying and selling a business. Things like NDAs, confidentiality, and NON-COMPETE agreements are critical in the evaluation stages of any business venture. Once a deal is in the works, you’ll want to familiarize yourself with asset purchase agreements, share repurchase agreements, and consulting agreements. All of this makes a difference in how you structure the deal and affects taxes for both parties. Another detail you want when you BUY a business is a performance clause. I bought a business, looked at maintenance income, and offered a fair price. I came to find out that the person I was dealing with was not honest with the numbers. In the first three months, half of the income was NOT realized and because I did NOT put a performance clause in the agreement, I got everything but the kiss. Needless to say, I had to bust my ass to break even on the deal and then make it grow.
Bad treatment like this can cause a lot of stress and problems, so EDUCATE!!!!!! I prefer that you learn from my mistakes instead of committing them.
3. Finances: These are the report cards of a company. Must be able to read financial statements and go deep into areas and ask a LOT of questions. This is important because financial scams can be hidden very well in a nice financial statement. Specific cases, Enron, Tyco, WorldCom and IOUSA!!!!
There are different types of businesses and some are stronger than others. Warren Buffett is a big believer in easy business. He would rather have a great business that can succeed with average management than a really difficult business that needs a wizard to make it work. That’s why he invests in food companies like SEES Candy and Dairy Queen and NOT car companies like GM. There are two differentiators here. One is the moat, which is a competitive advantage, and the other is the capital investment. Every two years, car companies have to invest all their investment in the next car model. Dairy Queen simply needs to invest in more cash-producing assets or give the money to their owners. If you’re looking to do business, spend some time on business types. I will profile more of these in future tutorials.
real world examples
1. If you hate paying too much for something, you’ll hate my two stories. There’s an old saying in poker that if you don’t know who the jerk is at the table, then you’re the jerk. Well, in two cases, I really screwed up buying businesses. The first business I bought was 15 years ago (I’m still paying for 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 didn’t value it.
4. I was too excited to close the deal: Emotional happiness can lead to intellectual bankruptcy.
5. I was the tuna negotiating with the sharks. All these things were my fault. My second fiasco was the deal I talked about earlier where I didn’t include a performance clause in the contract. This was a huge debacle. These were my two standout DUMB ASS moments. They were both MY FAULT!
2. I never like to end a review on a bad note, so I’ll outline some good things. I bought an IP (Intellectual Property) company for 10% of the proceeds. This is unheard of in the world of software. This deal came out of nowhere and the equipment we acquired is excellent. The lesson here is if you’re looking to buy a company, look to really big companies that are spinning off divisions. The best deals I’ve gotten are from large publicly traded companies that need to take assets off the books at the end of a quarter. I’ve done this twice and it’s like buying dollars for $.10 cents. Think about it. If you have a company that generates a billion dollars in revenue, do you care if you sell a company for $50,000 or $200,000? Not really, this doesn’t even make a mark on your financial statements. If I can give any advice, it would be to look for these types of opportunities. These might make you feel like a Magnificent Genius, but real-world business has a way of hitting you in the forehead, so never keep your head in the clouds.
There are a lot of great resources in Garrett’s book. I highly recommend the Appendix sections if you are buying or selling your business. Another key differentiator would also be approaching a large company. The amount of money you will pay or receive is night and day. If someone wants me to buy their business, I’m going to negotiate a lot on the price, but if they go to a big company, an extra zero means nothing to them. Keep this in mind.
I hope you found this short summary video helpful. The key to any new idea is to work it into your daily routine until it becomes a habit. Habits are formed in as little as 21 days. One thing you can take away from this book is to ask questions. This is probably the best advice because the area covered in the book raises questions. Also, trust your gut. If something seems to be true, then it is.