What is an LBO?

Josh (00:00:02) - Good day, fellow dealmakers. We got seven minutes on the clock. I'm here with my friend Daniel, and we're going to talk about buying businesses and then implanting an operator. Right. And that's the business model. So Daniel, welcome to the show. Tell us about how you came up with this business model and what have you discovered working in it?

Daniel (00:00:22) - So thank you. Good to be here. And honestly, this is not, my creation by any stretch of the imagination. this is stuff everybody's been doing for a very long time. So, effectively leveraged buyouts is the model. and what I've discovered is the biggest, criteria for being involved in the leveraged buyout market are two things. One is the willingness to be continually re-educated. And the second is you have got to have the the high levels of endurance to see this thing through.

Josh (00:00:55) - Yeah, for sure, for sure. All right. So when you're, when you're looking at a company, you know, I've heard elbows and you know studying economics and finance back in the day.

Josh (00:01:04) - What is an elbow.

Daniel (00:01:06) - Well leveraged buyout is is taking a business acquiring it through leverage. Now that could be actually leveraging the business's own assets against the buyout. It can be leveraged in the form of debt and equity. It can be leveraged in a lot of different forms. But the idea is you are not taking $3 million out of your pocket, slapping it on the table and saying, here we go. You're going to leverage something else in order to make that acquisition. Yeah.

Josh (00:01:32) - So you get you get yourself involved into an elbow. Right. And then at some point you have to make that money back. Are you focus on cash flow or are you focus on some type of exit. You know, like what is what's the endgame for you guys?

Daniel (00:01:48) - So we're definitely focused on cash flow with every acquisition. And for us, every acquisition has to be able to support itself. So its own cash flow has to support the whole debt and whatever leverage we're using. the end goal really is to take, these individual businesses that are good at doing a thing, but really bad at the business part, the business administration.

Daniel (00:02:09) - Fix up the business administration, build in a real sales function and start them growing, and then attach them together with other complementary businesses. So now you have a bigger whole that you can sell upward for the increased organic sales volume that you've added. But also there's going to be a little bit of multiple arbitrage because of the hole that you've built. The cash flow of that is significantly larger than any of the individual entities.

Josh (00:02:35) - Yeah. Why doesn't the owner just do that themselves?

Daniel (00:02:39) - why doesn't the owner run it like a business? The answer is because the owner is so focused on the one thing, delivering this service delivery and creating that product and making it really good. I mean, there is no dishonorable reason. They're not just they're so focused on, I have to deliver this that they're not educated in the other things they can do with their business, and they're not good at them either. And so they just figure, okay, well, I'm just going to keep delivering an awesome service to my clients and making money.

Josh (00:03:05) - Yeah.

Josh (00:03:06) - When when you approach a an owner with this, do they, do they feel defeated that they might not have been able to to crack this code and hit this multiple or what? What is the general sentiment of the conversations when you first start with the owner?

Daniel (00:03:22) - So generally speaking, we're looking at we're talking to owners who are actually looking to exit. Right. They've been doing this for a long time. What they they know how to do the thing and they know how to do it for lots of hours a week. what they don't know is how to get out. They plan. Usually they planned on exiting to a employee, exiting to a child, but not have those worked out. So now they're looking how do I retire without destroying what I built, without harming the people that I, you know, am with more than my family? Yeah. and so they don't know how to go through the process. and that's kind of what we help teach them while we're doing this, is how to do that exit and ensure still that your employees are taking care of the legacy of the business continues on, those important things to them.

Josh (00:04:08) - Yeah, for sure. Now, you know, I grew up in a family business, and my dad knew construction, right? He knew construction wasn't the best at business. But dang, that guy knew how to make something and develop and and build. So, you know, he let's just say he built it in one day. Wanted to sell it. He he exited the business through, you know, through death, not through, you know, which that's what we don't want owners to have to do. Right. But you know, he he builds this thing and, you know, he let's just say he had one opportunity to exit that. There's a lot to learn in that process of exit. Whereas that's kind of your old specialty is coming in helping them exit, build more value than having another exit down the line. Is that right? Do I have that in okay. So with that, what are the biggest, objections you have when talking with an owner about selling the business?

Daniel (00:05:04) - 011 break point is often in valuation.

Daniel (00:05:09) - they don't know how to value it on the market basis. Right. what they know how to value is I put 20 years into this. That must be worth X. Or my accountant said I needed this much to retire, so that's what it's worth. That's usually the first sticking point. But we just explain and can show them with data. You know, this is kind of where the market is for that. And so to get back to your question, your original question, the biggest valuations are done based on a multiple of the really cash flow that they create these businesses. So the best thing a company can do is to drive more money to cash flow. Now that's ironic because what they spent 20 years trying to do is make it tax efficient so they don't pay taxes, which means zero profit as much as close as you can get. So transitioning to that, bigger bottom line that will have to pay taxes on is really the answer to how to get the valuation to where you want it to be.

Josh (00:06:04) - One's a lifestyle business, one's an excitable business. And a lot of times business owners operate it to, you know, decrease their tax liabilities to create a good lifestyle for them. But at some point they're going to need to exit to their kids, to the grave, or maybe to a group that's going to take it and grow it. Ten x so for for the people, for the business owners out there, or maybe for some operators that wants, an at-bat for some opportunities, what's a good place to connect with you and potentially do a deal?

Daniel (00:06:35) - So you can always find us at our website, which is the is, Sweet View partners.com. I'm active on LinkedIn. You can find me there. My email address. Shoot me an email d suite at Sweet View partners.com. And here's a bonus I am giving a talk about how you can begin to prepare your business for sale at the Key summit, which is incidentally the key summit.com. It's free. so I'll be giving that information to speech there really soon.

Josh (00:07:04) - Very cool. Hey. And we did this all in under seven minutes or less as all. Always reach out to our guests and say thank you for being on the show. Their contact information will be in the show notes below. If you have a deal that you'd like to talk about here on the deal, scout, head on over to the deal scout.com. Fill out a quick form, maybe get you on the show next. Till then, talk to you all on the next episode. Love you guys. Bye bye.