David C. Barnett
speaker
164 appearances
1 recordings
1 series
first heard Nov 2024
last heard Nov 2024
David C. Barnett’s voice in public audio — every appearance, attributed to the second.
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Appearances
So take advantage of your personal network because it can lead you to individuals that can really inform this background information that we keep alluding to, where you can get a better understanding of how a business works. And here's what I've learned. And maybe some of your experience mirrors this. If you see something that looks like a tremendously profitable business with little competition,
dann ist es wahrscheinlich etwas, das du nicht siehst. Korrekt. Denn in den normalen Operationen einer freien Marktökonomie, wenn jemand wirklich hohe Margen zahlt und wenig Wettbewerb hat, wird diese Situation neue Einflüsse in diesen Markt erzeugen.
Und diese Vorteile werden auslösen. Alltags wird es Wettbewerb geben, es wird Preiswettbewerb geben, die Margen werden auslösen. And eventually people end up in a position where solid players who deliver well should be sustainably competitive and profitable, but not crazy profitable.
The places where crazy profits live are where there are sort of these moats or interventions, which are often not natural. So things like patents, you know, why are drug companies so profitable? Well, they get this government protection in the form of patents, right? Why are some device or machinery manufacturers profitable to an excessive degree?
Because their brands are trademarked, their machines they've invented are patented, this kind of thing, right? In the world of small business, you're not often going to get into those kinds of scenarios. You could be a monopoly, like you're the only taxi company in the small town, but that's probably because the town really can't support more than one.
So you're not going to be able to charge double the rates of other taxi companies in the world. You're still going to be hemmed in by these substitution competitors. That taxi company might have a monopoly, but if you charge too much money, people are just going to ride their bicycles or ask their friends for rides or hitchhike. They're going to find ways around your excessively high prices.
Exactly.
Yeah. So run your business clean. So everybody wants to put personal expenses in their business because they want to maximize their lifestyle advantages. And then when they try to sell their business, they want to then say, oh yeah, but we need to add back, you know, my daughter's cell phone bill. And we need to add back this trip to a conference in Bahamas. Right. Right.
And you know, all this stuff. And let me be clear. A buyer may delve into that hole with you and fully appreciate, understand and accept everything you've said and be willing to pay you the price based on the cash flow you are then creating with these ad backs. You might just have to find the right one. Now, here's the problem, though.
That buyer then has to show their banker that all of your ad backs are correct. And the banker has to agree with all the ad backs.
So I've often said that if you want to run all your personal expenses through and never have a profit every year so that you don't have to pay income tax, the cost of that behavior is going to be that you will likely be the banker. that you are going to sell to someone who will give you a down payment and you will hold the note on the entire thing.
That person cannot get financing for your business. And so, you know, when people hear that, they get all up in arms. But, you know, if you want to sell for top dollar and you want to walk away with a lot of money on closing day, the business has to look good to a bank, not to a buyer, to a bank. So that would be the number one thing. Number two, every buyer is worried that
the love and affection of the clientele is towards the owner and not the business itself. So you have to be able to demonstrate that people are not, or the business is not relying upon the ownership in order to, to make the sales happen. Uh, and if you have key relationships, like you'll hear this all the time from people in particularly like in, in, uh,
Highly technical service or consulting businesses like a big engineering firm or architecture firm or something. People do business with that firm because they have relationships with the owners. So if you own a business like that and you want to sell, don't be surprised when part of the deal is that you stick around and work there for years.
Because the buyer wants you to be there to transfer the goodwill of those relationships over to the new team. And so that's got to be something that's worked on. Either you work on it today and get your customers used to dealing with employees, or you're going to work on it after you're no longer the owner. And it's going to affect the value.
Another common issue would be people that are cruising or sliding towards their exit, where they take their foot off the gas and they try to maximize the cash flow by ignoring or deferring maintenance and capital expenditures.
So if you're planning on selling your business in five years time and all of your trucks are five years old, don't think you're going to get top dollar if you're trying to sell it with a bunch of 10 year old trucks. Denn jeder Verkäufer wird sich das anschauen und sagen, wenn ich dieses Unternehmen kaufe, muss ich ein paar Autos kaufen.
Also muss man das Unternehmen operieren, als ob man es nicht verkauft. Man muss normale Arbeitsbedingungen haben. Man muss Dinge per normal reparieren und verändern. Es ist auch einer der Fehler, die Verkäufer machen, weil... Depreciation and amortization get added back in this process of creating EBITDA or seller's discretionary earnings.
And those two things are how accountants recognize stuff wearing out over time. And so if you don't realize this as a buyer, you could end up in a situation where part of your cash flow you think you're going to get is actually going to go into capital expenditures. So CapEx is a big thing. As a seller, you want to make sure you keep up your stuff. Manage inventory properly.
So if your business has an inventory, number one, count it. Your accountant is going to want you to count it every year so you can file proper tax returns. Depending on the type of business you have, that may not be enough. You want to count it often enough that you actually create information that allows you to manage the business.
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