0046 - How to Define Your Buy Box and Finally Buy a Business

Today, I want to walk you through something that will dramatically improve your chances of actually buying a business. Because the fact is, a lot of people are doing it Because the fact is, a lot of people are doing it a little bit backwards or kind of half assed. Welcome to Business Buying for Financial Independence. I'm Tim Delaney, and I help young professionals buy small businesses so they can escape the 9 to 5 and take control of their time, income, and future.

If that sounds like you, hit the subscribe button and let's get into it. Most people start with scrolling the websites, go to BizBuySell.com, scroll through the listings. And in reality, I think this might be a great way just to kind of get your feet wet.

But when you've decided to take this seriously, you need to switch up your strategies. You need to kind of stop just mindlessly scrolling through the listings. You need to stop just randomly calling a broker with anything that looks halfway decent, and continually saying, I'm open. You need to clearly define what your BUYBOX is, what you want, why you want it, and what you're going to do with it.

This is how you get serious and start finding some real opportunities out there. As with a lot of things in life, it might sound like your chances are better if you're casting a broad net. But in reality, the smaller your net, and the more defined you are, the more likely you are to find something that is going to be the one that you'll pull the trigger on. Especially in business buying, a lot of times - and I am guilty of this as well, You see something, you get excited.

It's new, it's different. But then as you get a little bit further down the road, you start seeing all the pitfalls and you start seeing all the ways it won't work and the ways that it won't work for you. And you end up moving on to the next one. So the more narrow, the more specific you can get in your search, the easier it will be to pull the trigger when the right opportunity comes along.

And so I developed kind of a simple framework that will hopefully help you in this. And I've called it BUYBOX. B-U-Y-B-O-X. Each letter stands for something.

And I'm going to walk you through those six steps to create your own BUYBOX so that you can search more diligently and more efficiently, for the right opportunity. So the first step is B: Build your Outcome. What this means is taking a step back and kind of defining what the right outcome is for you. What does your life look like when you've bought this business?

What do you want to be doing? What kind of lifestyle do you want? Is it something where you want to be working 80 hours a week? Is it something where you want the freedom, to come and go as you please?

Are you just trying to replace your W-2 paycheck? Are you trying to build a $50 million enterprise? Are you trying to roll up a whole bunch of companies in the same industry? The answers to these questions are going to help influence what type of business you want to buy.

For example, if you're just trying to replace your $120,000 a year salary, the options for types of business out there might be different than if you're trying to go out and buy 7 to 8 different businesses in the same industry over the next five years, so that you can roll those all up into one and package them for sale to a private equity company. Because when you're looking at that later opportunity, you're going to need to look at an industry where that is feasible, where there are going to be many different opportunities over the next five years, and where there is private equity buying at that higher multiple.

Knowing what your outcome looks like, knowing what you want to do, how much cash flow is, is the business kicking off? how much cash flow is, is the business kicking off? Is it something that you plan to control forever? Is it something that you plan to hand off in the future?

All of those types of things of building your outcome, envisioning where you plan to be in the next 3, 5, 15 years with this business is very important aspect of building the BUYBOX. The next step - U: is Understanding your Constraints. How much money do you actually have to put in? And I'm not saying you have to have millions of dollars or even any dollars.

Knowing your constraints is part of this. You could have $0 and that's fine. It's not highly recommended, but knowing your constraint is important. This is all about understanding what your constraints are because it might eliminate certain businesses right off the get go.

How much money do you have available to invest? How much debt are you comfortable signing for personally? This is something personally I have no problem with, but I know for other people it's a huge factor knowing that will limit the size of the business you're able to buy, depending on how much cash you have available. Understanding how much availability you actually have to work and where and when you are able to work, you know, if your constraint is you can't leave your city, because of X, Y, or z, then that might constrain you can't leave your city, because of X, Y, or z, then that might constrain you from buying certain types of businesses in other cities.

If you are completely unable to work weekends or nights for some reason, you know, you know, you don't sleep well, you don't have, or you have a spouse works certain hours and you know that you're not going to be available because of X, Y, or z reason during certain hours - that's good to know. Understand those constraints so you can plan for them during the search process. Are you comfortable managing employees? How many employees are you comfortable managing?

Are you going to be okay with being a leader? All these types of things can be constraints. And understanding where they impact you is a very important thing to to decide early on in the search process. Y is for your role.

What are you going to do day to day in this business? Are you a salesperson? Killer salesperson with a good track record in sales? Maybe buying a business that already has a killer sales team in place is not the right fit for you.

Maybe you need to find that business that has amazing operations, but has just lacked in the sales department, so you can step in and be the salesperson if that's what you want your role to be. Are you going to be the manager? Are you going to be the CEO? Are you going to be there 8 to 8, seven days a week?

Are you going to be an absentee landlord, or an absentee owner where you're just letting the staff do their thing, keeping everybody in place and just checking in once a week or once a month or whatever the case may be. Your role will help define what type of business that you're going to buy. Every business opportunity out there requires something a little bit different from an owner. You know, some of them will require you to be that day to day in the weeds at the beginning so that you can grow out of it.

And if that's your role, that's fine. You just make sure that you understand what your role is. Are you going to be leaving your W-2 job? Are you planning to try to stay in your W-2 job?

So all those types of factors will influence what your role in that new business is, And you just need to understand what those are - so that you can help define the type of business that you're going to buy. So, now we have the BUY part, B-U-Y - moving on to BOX. B: Budget and Financial Criteria. This is where you start to hone in on the the price and the numbers that make sense to you financially.

What is that target price range? And this can vary quite a bit depending on some of those constraints we talked about earlier, such as your cash available, such as your comfort level with that, and how much money you have to put down for a downpayment - or how whether or not you have potential investors or partners that can be coming into the deal with you. So this is the budget range of where you want to be. Either purchase pricewise, or cashflow-wise, after you service the debt.

So another way to think about the budget doesn’t necessarily have to be in - okay, I'm going to buy a business that's the price is between $500,000 and $2,000,000. It can be in terms of after I pay the debt service and not including my salary for running the business, I expect cash flow of X number of dollars or X percentage of the cash that I put into the deal. That's called a cash on cash return. So defining your criteria of monetary you budget things is very important for the search process.

But it does not have to be a specific dollar amount for the purchase price. Your budgeting and financial piece of your criteria can be based off of profit, cash flow, or other financial metrics as well, not just purely the purchase price. I also just want to kind of double down on that that debt servicing piece, kind of double down on that that debt servicing piece, because a lot of newbies to searching kind of forget about that. because a lot of newbies to searching kind of forget about that.

So you might see a business advertised with a $200,000 seller discretionary earnings. That is the reasonable expectation of what you will get if you buy that business for the price. for price that the business is kicking off $200,000 a year. And you might say, well, that sounds good.

I can live off of that. But you got to remember that from that $200,000, you're going to be paying debt, most likely, unless you're paying all cash for the business. So if your debt payments are $100,000 a year, then in reality, you're only going to be making $100,000 a year at best, taking home that money. a year at best, taking home that money.

So is that still good enough for you for that first five, seven, ten years of the business when you're paying down the debt? It's just a very important piece to keep in mind. But you also have to be realistic as well. You can't just say, I expect, after that cash flow to pay my initial investment back in two weeks.

It's just unrealistic. It's not going to happen. And so your criteria is, in that sense, is going to be way too narrow and almost never going to result in a good business find. This next step I find pretty valuable.

And sometimes I'll even move it up in the priority list. Which is opt out. O: for Opt Out. This is making a list of the different types of industries or businesses that you know you want nothing to do with.

So for me, restaurants, quick service food, a lot of food oriented businesses. Manufacturing of food is something that might be okay for me, but any food service type thing is generally not going to be the right fit for me. So it's easy for me to just say, nope, those are out of the question. Opt out.

For you, that might not be food service. You know, bars and restaurants are included in that for me. I don't want the late nights. I don't want to call at 3:00 in the morning because something happened at the bar.

Sure. Can something happen at any business in the middle of the night? Yes, it can - but when your workers aren't there and there's no customers there at 2:00 in the morning, there's way less chance that something bad is going to be happening in your business at that hour. Unless you're an international company with customers all over the world, okay.

So always going to be caveats. But just kind of figuring out those things that have no interest to you - could be a marketing business, or some people just say that I can't deal with services. I can't deal with the customers in a service setting. Great.

You know that those types of businesses are out. It might be manufacturing. Maybe - you know, you know nothing about making things. And you don't want to know anything about making things.

Push that aside. Could be a because of the types of hours or nature or the travel that just doesn't fit your lifestyle, the style that you want. Cross them off your list. Just make it clear that those are not in the realm of possibilities for you, so that you don't waste your time looking at them when they come up, or you don't waste a broker's time sending you deals like that that don't fit that that criteria for you.

It's important to set those boundaries because otherwise you'll find yourself even though in the back of your head you know that something's not right fit for you. When it comes up, because the price might be right and because the cash flow might be right, and because, the role might be right. It might be kind of in the outcome that you've built for yourself. You might say, oh, okay, maybe I should take a little bit of a deeper look at this.

But in reality, you know, it's not a good fit. You know, it's not something you want to do. And so you'll probably end up passing on it at some point anyway. You may as well pass on it right upfront.

And then the last step - the X is for Execute the Search. So you've got all of your criteria together now, thought through all these questions carefully. You've laid it all out. Put it together in a very concise sheet of what exactly you want and what you want to do, and start your search process.

Go out, start calling brokers, start looking at the listings online. Start showing up a chamber of commerce meetings, talking to accountants and lawyers, letting them know exactly what you're looking for. And with that very concise sheet, when you share that with somebody, they will be more likely to have a business pop up in their minds than if you just say, in general, I'm looking for a business to buy. With that very concise criteria that you've put together through the BUYBOX method, you are letting people know what exactly you want, and they might think of something almost immediately.

Or when something does come up later down the road, they will remember you because you were specific in what your criteria was to buy that business. Things will change. You know, it's important that you kind of revisit this on a regular basis, and as you look at deals. You know, as you look into one deal that maybe fit your BUYBOX criteria initially and then you end up passing on it, was there something in that that you can add to your BUYBOX, or remove from your BUYBOX so that you don't look at that same business again in the future, you know, think about why you didn't like it?

Sometimes it's just the numbers or the, you know, they misrepresented something. Whatever. But sometimes it might be something as you get into it that you realize, yeah, you know what? This industry I don't like either or, you know, this, this cash flow might not actually be enough, based on the amount of debt or the, what I'm going to put into it.

based on the amount of debt or the, what I'm going to put into it. So I need to change that number range a little bit. So just always be fluid, be adjusting as needed - so that you can continually refine that BUYBOX and find the opportunities that are right for you. The more you can take your initial emotion out of this process, the better opportunities you're going to find.

It's okay to get excited about things, but make sure you're getting excited about the things that already fit into that criteria that you've defined. So at the end of the day, the people out there that have been searching for a business and haven't been able to find anything, it's not necessarily because there's not businesses out there for them to buy, it's because they have not taken the time to clarify exactly what they want. I heard a quote recently that, success is getting what you want.

So by definition, in order to be successful, you need to know what you want because otherwise you'll never be successful. Buying a business is very similar in that regard. So if you haven't taken the time to kind of build out your outcome, to understand your constraints, to define your role, to lay out the budget and the financial criteria to opt out of industries and types of businesses that you don't want and to execute your search, then you're never going to find the right business for you.

And then chances are, you will never find a business because it's not the right one for you. So stop wasting your time. Take a step back, spend a good amount of time and effort building out your BUYBOX using this method and your search will go a lot smoother and people will start bringing better opportunities your way as well. We'd love to hear from you - what methods you've taken to build out a BUYBOX, or what your BUYBOX looks like, if you want to share it with others, in the comments, that would be awesome so that new people can see in the comments, that would be awesome so that new people can see what a BUYBOX looks like and how concise it can be.

Love to hear from you on this or what other questions you have about the business buying process. Drop them in the comments below and I will see you all again soon. Cheers! Thanks for listening to Business Buying for Financial Independence.

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