New Year’s Resolution? Make. Some. Money.

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman this week Sean busy Paul DS and Laura Xander talk about why 2023 was so challenging for them and what they plan to do differently in 2024 last year was a year when I knew I was going to be making a bunch of Investments and didn't expect to show much or any of a profit says Paul and I absolutely nailed that goal Sean meanwhile thinks his new marketing scheme is working and is addressing her issues by going shopping shopping that is for businesses she's now bought a total of six and she offers a step-by-step guide to how even a relatively small business can grow through acquisition including what she's looking for mostly companies in distress how she sets a price she aims to recup her cash outlay pretty quickly how she finances the deals not with a bank and how she integrates her old and new operations that can be a bear even in Good Times owning and running a business can be a lonely Pursuit our hope is that these weekly conversations brought to you by our principal sponsor the great game of business will let owners know they are not alone in facing challenges same thing with our daily newsletter the 21 hats Morning Report when CH magazine named the best newsletter for business owners and which you can subscribe to for free at 21h hats.com where you can also find transcripts of our podcast episodes and lots of other articles and interviews joining me this week on the podcast are regulars Sean busy CEO of Kinesis which is based in Portland Oregon and works with small businesses on marketing culture and strategy Paul DS CEO of Paul DS cabinet makers which is based outside of Philadelphia and makes custom conference tables and Laura Xander who is CEO of Jimmy beans wool a digital yarn store based in Reno Nevada and mateline TSH a yarn manufacturer and distributor based in Fort Worth Texas the episode is titled New Year's resolution make some [Music] money welcome Sean Paul and Laura it's great to have you here for our first conversation of 2024 I want to start today by asking you some basic questions just to get a sense of where your heads are at as we head into the new year for starters did any of you uh make res Solutions h no I did what did you resolve Paul I want to make a lot more money this year seriously can I piggyback on yours yeah no but but the context was last year was a year when I knew I was going to be making a bunch of Investments and didn't expect to show much or any of a profit and I absolutely nailed that goal congratulations and this year now I want to see some payback on that so I'm going to be concentrating more on cost cutting and efficiency and making sure that we're profitable all the way through are you thinking about achieving that more by uh efficiency and uh cost cutting or by growth um growth and the thing is that we did a bunch of uh sort of projects expensive projects and had one change to our basic fixed costs in 2023 the change was just that my rent went up because we renewed our lease and then took over another 15,000 square ft so my rent bill went from about 11 Grand a month to 23 Grand a month wow wow and that's a that's a significant jump but it's still much much cheaper than trying to move into a different facility so uh whatever the difference is there let's say call that 130,000 bucks and then we bought a new spray booth and put it into uh service and then was about $140,000 project and then all the marketing and new website I did let's call that 100 Grand so whatever that is almost 400,000 now we're going to show an acude loss of about 100 Grand so we would have been in pretty good shape if I hadn't done those things but those are the things I needed to do to get to the next level in the next few years how much space do you have Paul right now about 45,000 Square ft would you say $23,000 a month yeah it's still cheap Paul curious because I was listening to Lauren's recap episode and one of those shows was you talking about your two salespeople and the one who was drastically outperforming the other one and the other one who was you were not sure about his future well uh in September I believe I brought the underperforming one into my office and gave him a formal write up saying what you're doing is not acceptable and your job is in danger and uh told him that I actually didn't want to fire him but I would and neither of us would be better off the day I do that so get your together more or less and he agreed to do that and he did wow and he turned it around and in the last three months of the year he was selling at a pretty good Pace wow and then yesterday he came into my office and told me he was leaving no so everybody's a winner in this scenario I guess sorry to hear that oh man it's forced me to confront something that I should have confronted a long time ago which is that of all the different types of employees we have and we have shop floor people we have finishers we have Logistics guys we have Engineers we have project managers I've been able to successfully hire when I needed to for all those positions and I've never even tried to replace either my two sales guys and I knew I needed to supplement them sometime this year because we do anticipate more inquiries coming in and just need more horsepower to do it so the thing I've been putting off and dreading and avoiding has now been dumped in my lap and it's just time to put on my big boy pants and figure out how to hire a salesperson the other reason you were you did not want to have to fire him you told us uh when we spoke about this over the summer I think uh was that you were acutely aware that if he was gone you would have to take on his responsibilities until you did find somebody is that what's happening yep I still got him for another six weeks or so oh that's good and he's leaving to open up a franchise a tree care franchise which is uh sort of a risky move in my mind but everybody's business idea sounds like a risky move to me so he's a good guy and he he's done a difficult job for 11 years and it's fairly easy to get burned out on sales and so I don't fault him and I I just wish him the best and yeah I'm going to have to jump in and do his job but that will uh certainly incentivize me to figure out a way to replace him as quickly as possible how about you Sean any resolutions yeah I I've never been a big resolution uh guy I mean the data shows it's it's not a very effective strategy so like Paul I would like to make some freaking money this year that would be great um last year was a just the worst year on record for us um and so you know outperforming that I should be able to do it wow it was tough yeah it was really tough I think the fed's push on interest rates has had this sort of like wet blanket effect on everything and you know we felt it you know just a lot of slow decision making in the buying process a lot of folks you know oh him and and Han him and Han dragging their feet yeah so I I think I think they're done jacking up interest rates I think they're going to start to go down but yeah I would like to see more opportunities um I mean one thing that has changed is you know our marketing and Business Development strategy is just totally different now than it was yeah I was going to ask you about that Sean in the in the fall the last time we talked about this you told us about your 100 day um March strategy of getting your people out of the office and making connections and trying to uh Drive business that way have the 100 days passed and how's it going uh let's see we have four days left so it's going great um it's been a wildly successful effort I couldn't be more delighted yeah what worked tell us well so you know prior to this Initiative for folks who don't listen to every show uh most of Business Development was on my shoulders and then I had a person um about a year ago who like Paul left they were kind of like one of my key salese and replacing her was very difficult I really wasn't able to do it so we just reexamined how we did business development and we realized that we can't just have it on the shoulders of one or two people in the company that we need to really have multiple people in the company active out in the community so yeah we've just really activated the team and and folks are doing different things you know participating in nonprofits volunteering going to networking events you know just being far more active hey Sean yeah can I ask you like what metrics do you kind of put on your people like do they report to you weekly do they report monthly quarterly like how I I really struggle with how to manage and assess people who have Indiscreet roles you know like creative and marketing and yeah I mean you know so this initiative of getting people active in the community is newer and so I don't have at this point I don't have individual metrics for folks to hit but we do have a collective metric so we were trying to have 100 meaningful conversations in 100 days essentially asking for referrals and you know we are really close to hitting that number and and I think my my quote unquote mistake was I set this uh initiative right smack dab in the holiday season so it's really tough to get people's attention but nevertheless we did you know and with those you know we hit about 75 conversations that yielded 42 referrals that yielded four new clients I'm just looking at my dashboard here and then that resulted in probably $400,000 in new Revenue in the coming year wow yeah so for a company of oura you know we're just a little under 2 million yeah you know that's a huge and and then and then we had a meeting yesterday that could be another $150,000 so yeah I mean I think we'll get at least a half a million dollars in new business as a result of this effort God it's too bad you didn't do it earlier I'm just kidding what happens when the 100 Days End Sean are you going to continue this we keep going we we got to keep going and that's I think to Laura's point I think we need to start to have individual goals yeah you know not everybody needs to do the kind of level that I'm doing or some other kind of people in my organization um especially since some of these folks are servicing clients so you know we we'll find we'll find the right balance there yeah or a Cadence you know is it five conversations a month or 10 conversations a month yeah I I think the real challenge Laura in a business like ours and I can't really speak years but you talk about these like intangible roles you know of measuring people's performance yeah so much of the success of a business like ours is a collaborative effect you know it's not just one person it's multiple inputs and variables so I found at least in my business activating people around a shared goal tends to be more effective than like one to one and it's more like you can take a basketball team and look at star and go I need you to score 50 baskets in the next game or you can look at the whole team and be like we're going to win and I tend to think the ladder is a little more effective for our team and the culture we've built yeah no that's super interesting I mean my team does really well with like a super hard goal like that but they don't do as well as I would like you know with higher level goals you know that aren't quite as discreet you know if we say okay I need you to go make 200 $1,000 or whatever like then the whole team comes together they know their part they know they're going to battle like they figure it out they work it out together but then as soon as that goal is over you know and if we're like okay well for the Year this is the goal they can't really figure out how to get there yeah on the sales and marketing side um Jay and I have had so many conversations about this and that's you know like my struggle and do you get frustrated like before you set this 100 day goal or 100 conversations goal is there a moment of frustration where you're like why do I have to figure this out why can't you guys just figure this out yourself like it's not that complicated have meaningful conversations I don't know I mean I just I I try to give people the benefit of the doubt that everybody has good intentions and not everybody is a business development expert so I have to have a little bit of Grace and you know kind of see how it goes and and some people clearly are like not good at it and so part of our reset in the coming year is to identify okay how can you contribute to this effort if you're an introvert yes and and so that that gets us thinking about things like content you know oh you're a great writer so let's get you you know creating content or other ways you can contribute to empower those who are having those Business Development conversations yeah totally all right before we get to Laura's big news uh I just want to run through a couple other quick questions with you guys we know Paul's Hing A salesperson are any of you making other hires yeah I think I am and this goes I mean if you want to recap last year I mean I it sounds like I had a very similar experience to Shawn and to Paul I mean this was one of the worst years that we've had on the Reno Jimmy Bean side we did end up hitting our sales goals but we hit them in very low margin areas and so we ended up losing money so you know the team drove towards the goals but didn't so yes they did a great job and they drove towards the goals but you know it's easy to sell stuff at half off right I'm a little surprised to hear that because you had told us that you had kind of altered your business model to try to improve your margins by focusing on selling stuff with higher margins why didn't that work out the way you hoped yep that's a great question Lauren um that's a really great question and that's where I've been struggling this year you know in q1 our sales were way down and on the manufacturing side we figured out why it was because we had a person who was tasked with reaching out to every one of our customers and checking in and making sure they were doing okay and you know blah blah blah and they didn't do it and we didn't know they kept telling us that they were doing it and they were doing it and they didn't so um we solved that we fixed it you know we found out what was going on but then on the Jimmy Bean side our sales were down and that team collapsed uh and I think just kind of froze and we had a lot of emotional issues um a lot of crying from a lot of different people you know over a period of 6 months so we hired somebody really high level to come in and to help and it turned out that this person was a thinker and a strategist and not as much of a doer and you know it just caused a lot of friction and so I mean this year has just been am mess I mean it was just a mess um the most emotionally exhausting year that we've had since 2016 so back to why didn't we get the margin that we had thought well you know when our sales were down hundreds and hundreds and hundreds of thousands obviously that affected our cash flow and and this is my fault I mean I had forecasted and budgeted and everything based on sales goals that we had all committed to in high margin areas and when we found out that some things weren't being done to drive those sales goals the team pivoted we needed cash so I don't know if you guys are familiar but section 174 of the tax law like wasn't revoked or you know went back into effect and so our tax bill ended up being like double we needed to like put a ton into like hundreds of thousands into our tax bill unexpectedly is this the R&D provision or is this oh man that is such a oh it's anyway maybe you could explain that a little bit more um if I understood it better I probably could I mean in essence so for the Last 5 Years or 8 years or something like that we get an R&D credit we're a manufacturer right and we're a software company so we're developing our own software so we have hundreds of thousands of dollars each year that there's a percentage of that that we spend on R&D so it's salaries it's um testing it's sampling all these things so hundreds of thousands of dollars that are eligible for this R&D credit and then there's I guess I think a percentage of that we get a actual tax credit each year it's really hard because it's a credit a lot of people don't understand like a credit it's like dollar for dollar as opposed to a deduction so it's like all of a sudden you get this massive tax bill that you don't didn't see coming who's your Tax Advisor cuz I mean this was this has been known for a while so we had a bit of a heads up but we didn't realize it was that big and there was always you know fingers crossed and hope that it was going to go away and it was not going to be a problem but fair point would have been great to have more notice so we needed cash so the team did put together a you know let's raise two let's do $200,000 in sales this weekend or whatever it was um and put a bunch of stuff on and get rid of some inventory at really low margin or no margin at all so that was one big hit and then the other way that we still hit our sales goal was to hold these Retreats so we do two annual Retreats right now so we've got I you know 300 people that come and visit us between the two Retreats they pay you know thousands of dollars um but we basically make no money on them in a good year if we're doing well we'll make maybe 10 or 20% on it you know after the cost of food and the travel and all that kind of stuff but this year the contract that we had signed with the hotel for the food and beverage we made the mistake apparently of not locking in those prices and so the estimate and the figure that we were charging our customers was based on last year's the previous year's food and beverage costs and they went up like 30% and it would that was a big number I mean that's again $100,000 $50,000 $100,000 difference so you're talking about in the Retreats I mean we could do four $500,000 worth of sales and we made no money on it you know at the end of the day or very very little um it certainly wasn't the high margin stuff that we're looking for by doing manufacturing so we had a couple big hits where again we hit our sales goal but at the end of the day you know our cost of goods um and our gross margin was just significantly different than it was the last two years and then you know kind of what happened is as the shit's hitting the fan and I'm seeing that we're not hitting our sales goals you know in q1 and Q2 I start to dig well and it turns out that our sales coming from our social media channels are down about $300,000 and our marketing manager didn't tell us and she knew do you know why that happened Laura what changed um it's no I do not yeah it's a sensitive subject right now so you know I'm digging into that I'm digging into looking at our traffic compared to our competitor's traffic and we have a competitor that's only been around for a few years maybe five or eight years and their traffic is starting to exceed ours and I'm just like nobody's watching this you know and it is somebody's job to watch that and it wasn't being watched and I didn't realize you know I mean I'm just I'm not I'm not looking at that information and so Sean that's where I was kind of asking like metrics wise and you know how much do you look at that I mean it seems like you would want to because you're so heavy with you know direct sales and so forth you would want to have a you know a dashboard with just a few key numbers on it that your manager is responsible for and and talking to you about on at least a monthly basis I would think well great point so we have basically the two companies right we've got the one in Texas and we have the one in Nevada in Texas I have a team of four people that report to me right and so we meet every other week you know I have one-on ones once a month I've got you know a pretty clean dashboard you know that I look at but in Nevada I have one person that reports to me I have a general manager and her job is to manage all of these teams right and so they do have these dashboards and she sees all these dashboards but I've been so focused on the Texas business for the last four years that I've just been hands off you know so it's just turned into this kind of mess because I've been hands off but then all of a sudden I go over and I'm like what the are you guys doing you know like oh my God this is down and this is down and this is down and then that doesn't go over really well um sounds like good management to me yeah I inspired by that yeah I tried The Soprano's approach I'm like I'm you know flip some tables over you know yeah exactly I'm watching slow horses right now I'm just like that's who I want to be you know you guys are idiots like you're so dumb oh my God you know but then they rally behind him it works for him I don't know I I've seen the outcome of that show it's not I'm just kidding I am totally kidding I read all the books so you don't want to be there no so Laura all of that makes your news of the day a little more surprising I think yes given that background you have chosen to address it by going out and buying another business correct we bought two tell us more Laura yep yep let's go shopping let's go shopping you know I'm not going to do drugs I'm not drinking anymore so you know we'll just go shop and gamble what did you do so actually what I did was when sales were down this summer I decided to put a bunch of money on building a certain product for our team at Jimmy beans um so really diving into clubs so I went and hired some extra people I'm like if we can get a certain number of subscribers then this solves all of our problems you know we re like calculated everything we did it we're making it profitable what do you mean by clubs what what do you exactly are you doing um like subscriptions you know so somebody pays 30 bucks a month and they get a box from us you know that's got some yarn and a pattern and and you have different different clubs meaning different types of products that go exactly yes like you could knit a Shaw that's there's a Shaw club and then there's a blanket Club okay so this is your recurring Revenue model yes so put a bunch of money and effort into that and it didn't turn out the way that we had hoped it would turn out it's better than it has been in the past but it didn't it wasn't the Panacea it didn't solve everything so at the same time there's a brand that we used to carry that went out of business last January and in fact we hired two of their employees and that's gone really really well so finally was able to convince the owner of that business to let us buy the rights to their brand and we did that in December so bought the rights to their brand relaunched that brand um you know under the Texas side of things and have already paid for I mean you know just cash not profitable but you know have already doubled what we paid for the business so when it was very little work you know something because I already had two of their employees they already knew everything about the brand you know it was something that there was there was a lot of brand loyalty out there and then I had somebody come if I could stop you for one second just to make sure it's clear your Texas brand is uh a manufacturer you make mateline Tosh yarn it's a high-end yarn I believe you've told us it is and your acquisition here is another brand uh that you're going to make you're going to make it in Texas at the mateline TSH Factory or um not the shaboy one so the shaboy one that we just bought is comes from it's already died um and we get it from a mill in Japan so basically what we've decided to do is Jimmy beans is one thing so we're going to handle that in another in another way but on the mateline TSH side the Texas side we have decided to form the MOs Group which is a wholesale distribution and Manufacturing group of Brands so now that contains mateline Tosh which we manufacture in Texas it contains simply Shetland for which we're the North American distributor of that brand in Shetland it now contains this shaboy brand we do the Creative side and it's our brand this is the one you just bought this is the one we bought in December yes so that comes from Japan so that's kind of a pass through and then we just bought 4 days ago a another manufacturing hand dyed company that's in um tu on Arizona and we're going to move that brand and that manufacturing to Texas this month so now because we already have you know we've already got a space we already have a kitchen we already have you know we've already got all of the bones and everything that we need we've got this brand called dream and color which can go through the same processes that mateline TSH goes through but it's different Yarns it's different colors you know we'll have different Dyers but we've decided to expand the Texas business and the wholesale arm of our business by creating a group that has multiple different wholesale Brands you know with the goal of being in every yarn shop in the country so we're doubling down on the wholesale side of the business as opposed to the Jimmy beans direct to Consumer side of the business wow yeah would you be willing to wholesale to your big competitor um yeah we do there one of our best customers sounds like a good strategy yeah so now we went from like the brand that we bought a couple days ago this dream and color they have 414 customers um only 165 of those are Crossover with mateline Tosh so these are two different handdyed products so you know imagine two different brands of jeans Laura when you say customers you're referring to retail shops retail shops yeah and then Jimmy beans obviously is a customer and is probably going to be the biggest customer of all of these brands in the mattios group so that's where we're hoping you know we get a little of the extra margin bump so Laura at a certain point I think we heard you resolve that you were not going to buy any more businesses you were already concerned about the the time and the The Strain and the travel um how are you thinking about those things now that's a great question on the TSH side of things on the Texas side of things the team it's taken four years but the team is so solid and so strong that I basically don't have to do anything are you not going to uh Fort Worth as regularly as you were before um I'm still going once a month but it's but not like every other week like I was before so no I don't have to go nearly as often as I did and now the customer service team they're just taking over like I have a team so I mean it's almost like this is the way it's supposed to be you know we do this acquisition we have like a a transition team's taking on the customer service side of it Julie's taking on the this you know Luke's taking on the this ailia is doing this and Bam like all I had to do was pay the bills you know and and I'm involved but I'm not responsible for day-to-day tasks before I do these we ask everybody we're like do you guys want to do this can we handle it are you guys okay with it how is this going to look you know and they all want to do it you know they want to grow so as a result of doing this you know a couple people got promotions and they're able to take on more and do more stuff so yeah so it'll grow the business a couple million this year but as you said to us before you're still kind of struggling with issue unresolved issues it sounds like from last year maybe mostly at uh at Jimmy beans and now you you've added a lot more uh on top of that exactly would you say that the the acquisitions are are you making them despite the ongoing issues that you've had or as a response to them um probably a little of both what I have discovered and accepted I guess is that these two businesses Texas versus Nevada are completely separate businesses they just are they're I've tried to like merge them together I've tried to leverage you know social media knowledge let's just have one person that understands social media and advertising and can help all of the businesses and all the brands and it just it it hasn't worked it doesn't work so the Texas side of the business is very healthy right now and has a very healthy team and they want to grow so these Acquisitions are going to help them grow you know both personally and professionally and all that kind of stuff so the Nevada side of the business that is the one that we need some new strategy and need some new help and all that so by get it's it's almost like I've given the Texas team some stuff to work on and now I can spend this next year really focused on the Nevada side of the business and you asked you know is anybody thinking about hiring anybody and yes I'm looking at um a very highlevel strategy person that can handle the sales and the marketing um so that everything is not falling on my one general manager you know we've realized that that's it's just too much for her what's the size of that business Laura um it's about 8 million eight and a half okay that's it's a pretty yeah it's a pretty good siiz thing for one person um especially if they're surrounded by Junior people and that's what you know we've been talking about for years is that she just doesn't have a strong enough team you know they're more middle managers they're not you know like leadership team kind of they're just not at the same level and so she has to do a lot of the stuff is there something keeping you from pulling that business back over to Texas into sort of creating some consolidation and cultural efficiency and all that sort of stuff or is it like NOP too big too much got to keep it Nevada uh it's so funny that you would say that because you know for years it was the thought was the reverse like should we bring the Texas business to Nevada cuz Texas was really struggling but we finally you know it all comes down to just having the right people yeah so now we have the right operations manager in Texas she's been there for over a year and she's killing it and that just makes everything easier so no they're two very very different businesses I mean and that I think is another kind of um moment of Enlightenment that I had this year was that I think I was trying to mix these two businesses too much and one of them is you know the Texas business it's manufacturing it's just you know it's creation it's product development and it's distribution and it's wholesaling and the Jimmy beans business is an e-commerce business you know with a retail arm and I was confusing the two we had too much product development going on in the Jimmy Bean stuff and I think I was just spreading everybody too thin I mean just the difference in B Toc versus B2B they're it's so dramatic yeah you know the type of behaviors and how people think and all that stuff it's it's not that you can't combine those it's just this just different yeah Sean or Paul is either of you inspired to go out and buy a business by this not today I and I have zero interest in buying businesses it just it strikes me hats off to you Laura I mean it's an impressive thing that you've done over and over again combining cultures and getting people on the same page and having a Clear Vision sounds really hard oh it's my favorite like I love it I mean I really do like and wait you're not being sarcastic you love doing it it just doesn't always work the way you'd like it to um I I mean we've been you know knock on wood we've been successful with each of the ones that we've done well you you you're successful in the sense that meline Tosh was a mess and is now you know hitting on all cylinders but you did say that you've struggled a little bit to combine the businesses and make them you know more efficient absolutely that was the big mistake was thinking that it was all one company I mean it is all one legal entity but it's not one company it needs to be two separate I've got a wholesale business and I've got an e-commerce business and the e-commerce business is a customer of the wholesale business um and so making that really clear you know that makes all the difference in the world but you're right I mean that's been the part that yeah it's been really really hard you know we've bought distressed businesses um the one that we just bought in Tucson it's not distressed but it's not like it's growing Gang Busters I mean it's two women who have had this business for 15 years they've worked together for 30 years and had different businesses and they're one of them wants to retire and the other one wants to move on to something else and you know if we didn't buy it it would go away um and that's very exciting to me you know it's very rewarding to be able to take something and our goal this month is just not to it up that's it I'm like that's it that's our only goal this month is let's just not screw it up um let's try not to lose any customers are those Founders going to remain active in the business business at all they are they're going to help and this will be the first time that we've done it this way um but they're going to they're on contract to help us for the next 12 months um to be kind of advisers and so it's very exciting I have a question so you just talked about buying businesses as if you went and bought a car one day and uh I have heard similar stories in my vistage group and I personally find the thought of buying a business to be quite complex and scary how complicated is it to buy your your average small struggling mom and pop what do you have to do can you walk us through the steps yeah um it's actually one of my favorite Parts uh and now that it's I how many times have I done it four five six it's starting to become just kind of second nature I mean so for me I'm buying a small like a struggling as you said a mom and pop so these rules are very different and if we were going to go buy some strategic thing and we're paying like 10 times e blah blah blah so depending on the size of the business and how long I've worked with them and how familiar I am one they're all in our industry so there's a lot of um there's a lot of stuff I don't have to learn because I already know it right I mean I know how handdyed yarn works I know what the margins should look like I know how much their cost of goods should be I know how much advertising should be so typically what I do you know we have a conversation I have already kind of done some due diligence on the brand we go and we do some research on have these guys open their mouths in really bad ways you know are they serial killers are they you know like super right-wing fascists have they done something that has damaged the brand in some way so you know we put some feelers out and we talk to people and we do some social media research just to make sure they haven't like created anything really inflammatory which is a bigger problem in the knitting world than some might think correct yeah it is yeah it's a big problem so they've got to be clean I guess you know have a clean reputation and not be too far polarized on you know one side or the other and then I go into the financials so I get their financials for the last 3 years sometimes more and then I throw those into you know a spreadsheet and I first of all most of these businesses in our industry either aren't profitable or are relatively you know 5% you know it's not like some huge kind of profit margin so I take a look at everything and the first thing I do what I did in this case is I put together two different scenarios in the spreadsheet one is if somebody off of the street were to buy this business which ones of these expenses need to stay so rent they're going to need to you know pay rent salaries they're need to they're going to need to get insurance they're going to need to get all this blah blah blah so if somebody off the street were to come in buy this business this is what the profitability of this business would look like and then I do another scenario of if we buy it what does this look like well we're already paying rent so we don't have to pay any additional rent we already have insurance so we're not going to have to pay any additional Insurance um you know blah blah blah right down the line and then I look at the profitability if we buy it and then I talk to them and I just kind of say look like here are the two different versions of what profitability looks like and the value of the company is based on these two versions if I was a real I would probably press um I mean I probably am a real but if I was more of a jerk um I would probably press and say look if I were just somebody walking off the street the value of your business is very low because it's not really profitable but we have all of these things and can scale so why don't we meet in the middle somewhere so you know then I make them an offer and I say look this is here's the math here's how much I think the business is worth and it usually is can I pay this back in 2 to 3 years so you take whatever that net profit number is and I multiply it times 2 2.5 somewhere around there kind of depending on has the business been growing has it been shrinking you know is it stable and what that looks like so then you know we talk about that we're like okay does that work for you we go through that process once we've settled on a number that we feel comfortable with then we write a letter of intent and say okay we're serious like we will buy this from you for this price you know we talk about timing and then we go into you know quote unquote due diligence and that's where okay now after we've signed obviously a confidentiality agreement like early on then it's okay now send me your customer lists now send me you know your more detailed books so that I can really look through this and this is where the trust comes in you know how much due diligence do you need to do I mean how well do you know this company so if they send me their customer list it's not hard for me because I know our industry to validate or verify you know that their customer list is accurate and they're not just blowing smoke up my ass so you know and then I just do like in this case I went around to a bunch of yarn shops and I go look and I see are they carrying this product where do they have it displayed in the store how do they feel about this product you know blah blah blah and I do it kind of quietly um how do they feel about the owners you know so so then you know once I do all the due diligence and I feel comfortable then you know we put a purchase sale agreement together and run it by our lawyers and and then that's that then I wire some money over okay that was great thank you um but I have couple follow-up questions what does the lawyer slac accountant team look like that's backing you up while you're doing this um so my accountants I send the LOI so once I've got that in place I send that over to my accountants and I say look one do you see any red flags two can you give me any advice on this and they're going to they tell me the same thing every time right let's say I pay $100 for the business they're going to say as much as you can get um as much as you can pay for assets versus Goodwill you know the way you split it across um affects your whether or not you can expense it immediately or if you've got to expense it over a number of years because these numbers are relatively small all I don't sweat it too much like I would rather have a good deal and have good relationships with the sellers so there's that back and forth and obviously the seller wants the their accountant is telling them to do it one way and the buyer their accountant is telling us to do it the other way exactly the opposite way so you just have to find something in the middle so I just send I send the LOI over to the accountant ask for any advice let them know because then obviously like it's got to go on the balance sheet so it's actually pretty light okay so you don't have to involve a bank you don't have to borrow money to do any of this and you're just doing it I can write a check for these businesses is that correct yeah I mean it is the the one we bought in Texas we were going to get a loan so we did go through that loan process um and it's exhaustive that was like an SBA kind of loan yes yeah and they need to see obviously the all the financials of the business we buying all of our financial You Know da d d d da so what we've ended up just doing is using our line of credit or getting a PayPal loan instead um so what what are we talking about order of magnitude that most of these businesses can be purchased for less than 100 grand less than 500 grand less than a million um less than 500 Grand okay yeah so six figures yeah I imagine introducing the bank creates all kind of problems because you're buying these businesses that on paper are losing money so exactly the bank doesn't want to do that like no even though you see the vision for it know how to make it work yeah yeah so if there are other ways to get the money I mean yes I understand it's better to use somebody else's money but it's also a pain in the ass how does the PayPal loan work is is that a high rate um I think no I don't think Doug would know um he does that I don't think it's as high of a rate as like you would expect you know but you got to pay it back pretty quickly I mean we pay it back within 2 or 3 months you know we're not keeping these loans forever so I mean it's you know it's it's the old school way of doing things like if you can't pay cash don't buy it and how how long does a transaction like this usually take um two or three months probably they don't have options right I mean like you're you're a Lifeline they don't have options I'm guessing right yeah yeah I mean that's how it's turned out I mean and that's kind of what we have become cuz these these businesses were probably founded by baby boomer or gen xer older gen xers so they're like there's not a buyer there's not a buyer they're too small you know for like a big company um and there's a lot of consolidation in our industry right now so they're too small for a big company and they're really too big for most people it also sounds like there's rarely or Never Real Estate involved like these are just retail operations so rent's over with you know the lease is over you just close the doors you're done yeah and what I've found Paul is let's take this one that we're handling right now um I mean we're moving locations we're moving it from Arizona to Texas and that is going to be messy you know this month is going to be messy is there a basic problem with deciding what state the transaction happens in um you know that's a great question I've just always kind of done them in Nevada because that's what our LLC is in okay all right well this has been a great overview because I have opportunities to purchase companies that are sort of like what you're talking about except there's more equipment and inventory and often real estate but I've just been so terrified by the whole process that it would just be too complicated and I'm already stretched thin so what do you think is the magic ingredient on your side that gives you the resources to devote yourself to these transactions I don't know I just like it but you've got somebody else doing a lot of the things that your business does yes EX exactly like how much I guess how much free management headp space as a percentage is required to consider doing this well to do the transaction itself I mean that's 100% me you know or I should say 95% me but then down the line now because we've done I mean each one that we do I participate less and less you know in the transitions because now I've got a team that has gone through it as well and they know what's coming um so I am actually not partic ipating a ton at all but the very first one I did and the second one I did I mean I was 100% in I mean that was my full-time job for a while MH Laura I'm curious I think the first and second one you did if I'm not mistaken were uh overseas China and Vietnam maybe yeah yep which makes me wonder what's messy about um moving Tucson to Fort Worth I I I gather there no employees the the owners are going to oh there are employees yeah they're employees and so and at the prod is done so with China and Vietnam the production is still done in China and Vietnam we didn't change that it was just the creative side I see um but on in this case the production is actually done in Arizona so we're just we need to train our team in Texas while still having the team in Arizona produce for a little while so it's just a lot of moving Parts got it well guys I didn't get to all of my questions I'm uh sorry to say but they'll make another episode my thanks to sha busy Paul DS and Laura Xander and to our sponsor the great game of business which helps businesses use an open book management system to build healthier companies you can learn more at Great game.com thanks everybody wait wait don't leave yet if you have a question or a comment that you'd like the 21 hats owners to address send it to me by replying to your Morning Report or by email at Lauren 21h hats.com that's l r n at21 hats.com do it now before you forget and don't be afraid to tell Jay what you really think you can take it and if you got something out of this conversation help us reach more business owners tell a friend subscribe and review us wherever you get your podcasts follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by Jess tharon founder of blank word Productions okay now you can leave thanks for listening everyone [Music]