Why Most Business Brokers Burn Out, with David Barnett

LinkedIn: https://www.linkedin.com/in/davidbarnettmoncton/
Company Website: www.DavidCBarnett.com
Email: dbarnett@alpatlantic.com

Jason Cutter [00:00:02]:
Hey everybody. Welcome to another episode of the Business Broker Growth Show. I’m super excited. I’m going to have a great conversation with my friend David C. Barnett on the show today. So he is a private transaction advisor with ALP Ltd. He is an author, a consultant, an international speaker. He’s helped thousands of entrepreneurs avoid bad deals and achieve successful business exits.

Jason Cutter [00:00:25]:
He’s got an amazing YouTube channel, a lot of great content. Very excited because I know where this is going to go, even though I don’t totally know where it’s going to go specifically, but I know it’s going to be valuable for everyone. Tuning in. David, welcome to the Business Broker Growth Show.

David C. Barnett [00:00:40]:
Wow, that’s a great intro. I’m going to make my kids watch this.

Jason Cutter [00:00:45]:
It’s, it’s going to be fun. And the reason why the audience doesn’t know it yet, if they don’t know who you are, they’re going to find out. Because I have a bunch of notes from when we’ve talked before and some of the things I’ve, I’ve absorbed from you. So I know it’s going to be good. Let’s kind of talk about this because I think it’s important. I don’t always like to do like the background story and the journey and all that stuff and the hero story, but I think for you it’s very applicable for what you do now and why you do it. So let’s talk about kind of your path in business brokerage and you know, kind of that evolution to here.

David C. Barnett [00:01:20]:
So, so it started with finance brokerage. So I was brokering small business loans like capital equipment leasing for, for machinery and equipment. I was helping people get revolving line of credit from banks, all sorts of different financing for small business. And I actually worked a lot with bankers because when they couldn’t do a loan for somebody they, they would rather send the person to me than have them go to a competing bank across the street. So I kind of fit into that beat B tier of lending and I started to meet people who were looking to get money for entire businesses that were operating. And so this was my first introduction to the world of people buying and selling businesses, you know, sort of face to face. I knew there was such a thing as a business broker, but I hadn’t really interacted in that world and I started to meet people who were involved in deals that were really put together by people who had no idea what they were doing. So there were some real estate agents trying to sell businesses and, and actually a lawyer who wasn’t really that informed about business, business sales, like was trying to do a deal and I saw people lose deposits that they put down like earnest money.

David C. Barnett [00:02:29]:
I saw people buy businesses with no concern to operating capital and end up there on day one with the keys to the new business in their hand, realizing they couldn’t make payroll because they just bought a business that, you know, sends out invoices to customers and gives people 45 days to pay. And then it’s panic mode, right, because they, and they, they didn’t have the right advisor along the way. And so I started to, to see this kind of thing happening and I’m like, wow, like people are really getting screwed over in these deals. And then the big financial crisis of 09 hit and a lot of the companies I was working with for financing went under and I needed to make a pivot. And I thought, you know what, I, I don’t know how to be a business broker, but I, I’m confident that I can do a better job than what I’ve seen here on the street. And so I went looking and I joined up with one of the big international franchise brands that exist in the business brokerage world. And that opened the door for me to go and get some real training. So I did the, I joined IBBA and I did the certification program that they had and I completed that in 2010 while working under the wing of a more experienced business broker and getting advice from other people in the network I had joined.

David C. Barnett [00:03:39]:
And I ended up running my own office for three and a half years. I did 35 deals in that time. And that might sound like a business with a deal a month closing, but that’s not at all what the business was. And even to this day, like if you looked at the financial statements of that business through that period of time, you would see year after year growth in revenue and earnings. But what the financials don’t really tell you because they’re all dated year end, is that in each of those years, years I had a seven to nine month stretch with no closings. And so I had an office, I had a receptionist, I had an advertising campaign due like, like fees to my franchise network. I was paying for all kinds of office stuff, I was paying for software, etc, and at some points I was like tens of thousands of dollars in debt. And then I would close a deal, just get back to black.

David C. Barnett [00:04:31]:
And it was a very stressful time. I like to point out the gray hair on the side of my head and I like to say that this comes from that Period of my life, because it was, I got into business brokerage because I thought I could do it. I thought it was something that not a lot of people were doing. And I thought that I could make a lot of money. And you know, people see the commission rates and they go, wow, someone else is going to build a million dollar business and I’m going to sell it and I’m going to earn 100 or 120 grand from doing the deal. Sign me up. But they don’t really realize how much work is involved. And you know, just the number of deals that I’d worked on for, for months and months and months, only to have them fall apart for reasons completely outside of my control or the control of the buyer or seller was just astronomical.

David C. Barnett [00:05:16]:
And that led me to exit the industry at the end of 2011. And so that’s my career as a business broker. I got into banking, I became a banker, and I was working on completely different kinds of stuff and my phone kept ringing and it was people who had gotten my name or people I had met when my office was opened and, and they were looking for help on deals. And I used to say to these people, look, I’m not a broker anymore. I think I could help you though. Maybe I could be a consultant and you can pay me an hourly fee or something like that. And I work full time so I can’t see you during the week. And people would just say, oh, okay, great, where do you live? I’ll come to your house on Saturday.

David C. Barnett [00:05:57]:
And I ended up at the kitchen table, just like you hear about these business startups. I was at the kitchen table with a whole bunch of paper files at the time left looking at income statements and balance sheets and talking about the cash flow of a certain business. And it kind of grew as a little side hustle. And four and a half years later, which was now 10 years ago from today, the bank decided to reorganize and I was offered a package. And it was an opportunity to go back out on my own. And I thought, you know what, I’m going to help people buy and sell businesses again, but I’m going to do it differently. And so today we have a consulting practice which works with buyers and sellers. And, and we still do a lot of the work that a business broker might do, but we borrowed the business model of the attorneys and the accountants.

David C. Barnett [00:06:43]:
So what we do is we have a series of projects that we do when we work with a buyer or a seller along the pathway of an exit or an acquisition. And we have a fixed price for different projects that we do of different deliverables and for different sizes of businesses. And so that way people know, hey, if I want to hire David and his team to help me look at this business, this is the size of the business, this is what I will pay them and this is what they’re going to give me. And so it’s worked very well and it’s evolved over the course of time. We’re a team of five now and we work with people all over, mostly in Canada and the US So journey.

Jason Cutter [00:07:18]:
Before into brokerage and then leaving brokerage and then do leaving it completely and then getting pulled back into the world of acquisitions and intermediary type work. In your time now and in the past, what do you see? Because this, you know, show is mostly for brokers and help brokers, but also, you know, business owners who are looking at like, how do I learn more about this industry? Where’s that line in that divide for, you know, the good and great brokers out there? And then like the, the bad, the ones that are, I’ll say it, almost damaging or actually damaging to those business owners that think they’re going to get help.

David C. Barnett [00:07:58]:
I think that people who get into a business like this don’t get into it because they want to do a bad job for people. I think that people honestly believe that they’re, they’re going to do a good job. And a lot of the times people who get into business brokerage are former business owners. And it’s funny because I’ve heard a lot of business brokers who are former business owners get into it for two very different reasons. One group of people get into it because they got fantastic service from a broker and they really thought that things went well and they said, wow, you know, I’d like to be a part of that success less and I can do that too. And then the other kind of person is someone who got into selling their business with someone who kind of dropped the ball a lot and really sort of botched things. And the business owner thought, well, I could do this much better, I better get into this. So I’ve seen both of those groups.

David C. Barnett [00:08:45]:
One of the big problems, I think, is that because of the way business brokers are typically paid, it’s very difficult for somebody to actually become an experienced broker and get a bunch of deals under their belt and grow into the kind of professional that I think a lot of people want to be. And that has to do with model that the whole contingency revenue model where you, you know, you get paid a commission when a business is sold. And I can remember back when I joined that franchise network, they said, you know, in all of your advertising, you only advertise the office number. You never let a broker in your office advertise their cell phone number because that business owner who gets that piece of marketing collateral, they might decide in three years time that they want to sell their business and that broker is likely not going to be here. They knew full well what the turnover was of the frontline business brokers. And in my own office, I had several people go through that, you know, like the work, work to get your first listing that three, four months in, you get your first listings and you know, then you start to get some traction. You’re having meetings now and it’s exciting and you’re meeting buyers and maybe you even get an offer. And then you’re helping that buyer find the right banker and then you’re maybe helping them prepare their business plan.

David C. Barnett [00:10:02]:
Perhaps you’re working with the seller, you’re getting due diligence ready and then something happens and the deal doesn’t happen. And for some of these files, you can end up with a file on your desk for quite some time, like a year or more, and it still hasn’t sold. And for somebody who has bills to pay, they got a mortgage or, you know, young family or whatever, it’s a really tough business to get into. And this is why you see a lot of people in it who are kind of like retired people, like they have a pension of some kind because at least they have some kind of regular income they can rely upon while they work towards getting those deal closings.

Jason Cutter [00:10:37]:
Or to your point, it’s a business owner that sold and they’re sitting on the money to help carry them for 12 to 24 months while they get some momentum.

David C. Barnett [00:10:47]:
Right. I, I’ve, and, and I’ve met a lot of people who’ve been in that particular situation and after the first couple of deals slip through their hands and they realize, hey, there’s something to this that I didn’t quite plan for. And they start to realize just how many variables are floating around these deals. Like I said earlier, you can have a buyer and a seller want to do a deal with each other, and you can have a broker in between them trying to facilitate that. And forces completely outside of those three people can come into play that can derail the deal. And it’s frustrating because you get a lot of effort into it and other people aren’t invested in the deal like the broker is. So, you know, the lawyer’s got a lot of different clients that they’re working with. Both lawyers, the accountants, are the same.

David C. Barnett [00:11:33]:
The banker gets a check every two weeks from their employer, the buyer. If they have a job, they’re still working, usually while they work on this deal. You know, maybe they’ll leave that after they do the deal. Or if they own a business, they’re running that business. The seller, if it’s a profitable business, any delay actually puts more money in their pocket because they continue to own the profitable business. Right. And so it was normal to see things happen all the time that would delay the closing of a deal. And a lot of the times, if the buyer and seller had built that trust between each other and they, they knew they wanted to do the deal and it was some sort of administrative thing that just kind of popped up, that delayed things.

David C. Barnett [00:12:12]:
Everyone would just be like, they would just shrug and be like, oh, well, I guess we’ll have to do it at the end of the month or next month or whatever. But for me as the broker, it meant that I didn’t get paid for another month. And that’s the sort of frustrating part that really creates, I think, some PTSD among some people who’ve been through the industry.

Jason Cutter [00:12:31]:
And so what do you think the solution is for the brokers out there that are in that mode?

David C. Barnett [00:12:37]:
Yeah, it’s tough. I’ll tell you. At the IBBA conference, I think it was 2009 or 2010, there was a guy named Ted Leverett who did a presentation about non contingent buyer services and the ways that brokers could earn money without closing deals. And it was a packed session. And just a couple weeks ago, I saw an email come out from one of the business broker organizations on the same topic. It was like how brokers can bring in revenue by working with buy, you know, sort of bring some money in between deals. So. So I know that there’s still people out there who have a very keen interest in trying to smooth out that cash flow.

David C. Barnett [00:13:19]:
You know, if you were a confident broker who had a really great process and you could inspire confidence in your clients, then some kind of schedule of fees that included some kind of monthly fee would change everything, Right? Because that would remove the cash flow roller coaster from the broker. The difficulty is that if you’re in a competitive marketplace and there’s other business brokers willing to do it for less or willing to do it entirely on commission, it’s hard for you to be able to stake that out. And do it and, and get people who are willing to sign.

Jason Cutter [00:13:54]:
And I think that sounds good in theory.

David C. Barnett [00:13:57]:
Right?

Jason Cutter [00:13:57]:
Like, I think that’s a good way to go. And again, puts you more in the professional services bracket. Like you said, like the attorneys, the CPAs, the, the people who are getting paid by the hour for the work they’re doing or like a monthly retainer, you know, type of mode. But the challenge is, is what the competitive landscape, someone else who’s going to do it for less or do it contingent. And then what is the expectation going to be from that business owner who would pay that, let’s say hourly or monthly service fee? And then what are they expecting for a sales price to be? Right? Which I know is one of the big challenges in the industry is, is the business owner says, I want X. And then all the data says no, it’s not worth that, it’s worth less. But they’re, they’re hoping for that. And then where’s the like time wasting contingency for a broker who says, okay, I’ll do that just to get the business versus the okay, I’m going to charge you this.

Jason Cutter [00:14:54]:
And then that business owner is like, wait, I’ve been paying you for months and you’re not making it happen.

David C. Barnett [00:14:59]:
The I here, here’s one of the issues that I have with, with, with how the industry operates is that in certain ways it’s kind of born from the real estate industry. The business model is the same as what realtors have, but realtors have a much shorter selling cycle.

Jason Cutter [00:15:15]:
Right.

David C. Barnett [00:15:16]:
Generally commercial real estate agents have a longer cycle too, but they don’t have the complications that come with a business. And so in real estate there’s a lot of the, you know, talk about the idea that the agent is a fiduciary of the homeowner, like they represent the interests of that party and they’re supposed to try to help get the highest price and all that sort of thing. And what ends up happening is people in the brokerage industry, I think, kind of drink from the same Kool Aid bowl a little bit. And, and they’re focused on, hey, this seller, how are we going to serve their interest, how are we going to get the highest price, etc. And so I’ve even seen brokers encourage or create the expectation in the seller that they’re going to get a higher price. And it starts right with the marketing material where business brokers are saying, we’ve got the magic formula to sell your business for more than anyone else. And the five Big reasons why someone sells a small business are burnout, boredom and fatigue, divorce, poor health, the need to relocate and retirement. Now, four of those five reasons are unplanned for.

David C. Barnett [00:16:22]:
And usually when somebody is faced with one of those things, they want things to happen quickly, right? And so to go and meet someone who then says, I’m going to sell your business for more, you know, get this expectation of inflated price, etc, you know, and then you create a scenario where buyers are not going to want to meet that price, then it becomes difficult for you to get a transaction done. Whenever I’m giving advice to a business broker, I challenge them to think about their business like a retail shop, a candy store. So if you think about a candy store, you go in the front door and there’s all kinds of great things to look at. And the shop owner has gone and found suppliers who will let them put, you know, tootsie rolls and lollipops and everything on the shelf at a reasonable price so that I can afford to buy them and enjoy them and I’m going to want to pay the price. So a business broker should really be thinking about what is the buyer’s mindset, what does the buyer want to pay, what would make sense for the buyer? And now can I source that item of inventory from a supplier, I. E. The seller, at a reasonable price so I can put it on the shelf in my business store and actually move it and actually get somebody to step up and be willing to pay the price. And so when you start to look at your business brokerage as a business, you are a marketplace.

David C. Barnett [00:17:45]:
You’re a place where people go to business. You’ve got to get the inventory on your shelf at under a price that makes sense or under terms that make sense. So maybe it’s a reasonable price, but you’ve got a customer concentration issue. And you say to that seller, you say, look, I can probably get you the million dollars, but you’re going to have to hold a seller note for 50% of that and it’s going to be subject to offset if we lose that big customer in the first three years. Are you okay with that? And the problem is, is a lot of brokers won’t have that tough love moment with the business seller. They’ll just be so eager to sign the person up that they’ll take the listing and then they’ll, they’ll wait for that, you know, tough conversation letter when the offers come in. It’s funny that that example I just gave you is from recent memories from yesterday. I Was talking with one of the people that’s in, we have a buyer coaching group.

David C. Barnett [00:18:37]:
And so he made an offer on a business, a janitorial business that has a customer concentration issue where one client is a third of the revenue. And that was the kind of offer he made. He said, I need a huge amount of seller financing, 50% and there’s going to be an offset clause if the client revenue goes below a certain threshold in the first three years. And the seller was just like, no, I want to be paid all cash, you know, I know what my business is worth, blah blah. And so they didn’t make a deal. And then a month later my client circled back with the broker and found out that two other people made offers that were eerily similar with sort of post closing mechanisms to adjust the price or earn out facilities, etc. Because of this customer concentration problem that the guy had. And in my book it should never have been a surprise in an offer.

David C. Barnett [00:19:27]:
The broker should have been coaching that seller. Hey, this is the kind of thing you are going to have to accept because of the business you have built. And you’ve built a business with this huge amount of risk. I was on a podcast recording earlier today with a business owner who said that she had four large clients in her business representing over half of the revenue and in one year all four of them went away. Now she owned the business. She started from scratch, right? She built it. So what did it mean for her? It meant that she had to lay off some staff. So, so she was able to right size her business and she was able to continue in a profitable fashion after she downsized.

David C. Barnett [00:20:07]:
Now imagine if that business had been sold to someone just before and they had a huge loan that they were making payments on. You can’t right size a loan payment. You’re stuck with it. So, so it’s. But the business owners often fail to empathize with the scenario that the buyers are going to be in. When I’m talking to big groups of business owners, I will often ask them, I’m like, you know, who thinks running a business is tough? And then hands will go up in the air. And I’ll say great. And I’ll say, I’ll say, who here thinks that, you know, put, put a, put a number in your mind of what you think your business is worth.

David C. Barnett [00:20:43]:
And then I’ll put what the payment is on a hundred thousand dollar loan. And I’ll say great. So if you think a million dollars, it’s 10 times this number. If you said 700,000 is 707 times this number. I said, now how hard would it be to run your business with this payment every month? That’s when they start to clue in, you know, when they start to realize, oh, right, the business I enjoy today has a really great cash flow, but the buyer is going to have this big bank loan.

Jason Cutter [00:21:08]:
Right.

David C. Barnett [00:21:09]:
And it’s really surprising how few business owners actually have this understanding when they come to market. I challenge business brokers to go through that exercise. With people like, hey, like who sit down and go through the exercise, who’s the buyer likely going to be? Like, you got a small restaurant. The buyer almost certainly is going to be somebody who works in hospitality. They don’t have a lot of money.

Jason Cutter [00:21:31]:
Right.

David C. Barnett [00:21:31]:
So the down payment’s probably going to be quite meager. They’re going to have to borrow what they can. Restaurants are hard to finance. You’re probably going to have to hold some paper on the deal. This is the painting you should be sketching out in the person’s mind, I would argue before you even list them because you want to make sure that you’ve got stuff in your store that can actually sell.

Jason Cutter [00:21:50]:
Yeah. And I think going back to the sales, the pipeline, the financial, you know, pressures of a contingent commission only type of model with business brokers is where is the over under on them having that tough conversation or that honest conversation with that business owner to ensure that it’s a listing that’s going to sell, not just a listing that’s going to be listed and then waste everyone’s time or give false hope.

David C. Barnett [00:22:18]:
And so then the issue, I think for a lot of people that are in the industry is that they’ve got bills to pay. Right. And so, so if you know that you need money, then this person says, hey, I’ll sign on with you, but I want this amount of money or whatever you feels like. Signing that client on is a step along the path to earning yourself some money. And then that, you know, sort of, sort of like a deal with the devil. Right. Like, you’re okay, I’ll sign you up, even though I know that there’s problems with this. And then you just get frustrated as time goes on.

David C. Barnett [00:22:51]:
I was speaking with a broker the other day who actually admitted that he was about to dump one of his clients because the person wasn’t reasonable and, you know, wasn’t willing to actually respond or counteroffer offers that he said were just just slightly shy of, you know, reasonable. Right. So it’s like a good first offer. You might want to call this. And my thought was, you know, you. This should have been vetted in the beginning, you know, before you invested all your time. But it’s. It’s tough.

David C. Barnett [00:23:19]:
I mean, if it were an easy business, there would be a lot more people in it and the commissions would be a lot narrower. The reason the business is here and it’s available as an opportunity is because we’re talking about what I’ve often called the least transparent, least efficient business there is outside of some kind of illegal market. You know, because we’ve got secrecy, people don’t know what other businesses are doing or what they’ve sold for. And we’ve got a lot of players, buyers and sellers, who don’t quite know what they’re doing or have completely different expectations. You know, three different buyers could have a different idea of what they want in a business or what they find acceptable or what troubles them. And so you could have a. You could have what you traditionally think of as a great business, and some of those buyers might have a problem with it. Other people might want to buy the business you think of as troublesome.

David C. Barnett [00:24:11]:
So it’s a great opportunity, and it’s a real place where matchmakers can find a space. But like I said, you’ve got to get inventory in your business that you can sell.

Jason Cutter [00:24:22]:
Yeah, I think that’s one of the biggest things which, you know, kind of spawned not to get promotional on our side, but spawn to the business. And what we do is helping those good and great brokers fill their pipeline with the right businesses and the right owners that they’re working with, because it is. It is such a big deal. Like you said, there’s this weird inventory that doesn’t have a good comparable, Easy comparable. Right. Like real estate’s easy to compare. Mls, commercial real estate’s easy to calculate. But business is totally different.

Jason Cutter [00:24:56]:
And so, you know, then it comes down to the people part of it, which then, like you said, is all these people could mess it up or change that trajectory, could keep that deal from happening. And so where is it about, you know, making sure you have enough inventory that you don’t have one product in the store? Because I’m hearing you talk, right? And I’m imagining that broker scenario where you have that storefront and you have one product in the store, and you’re hoping to find the one per, you know, find somebody who wants to buy that one thing in your specialty store, not the candy store, but like, you have one candy bar and it’s oddly priced and it’s. Nobody knows what to do with it.

David C. Barnett [00:25:31]:
And I mean, it’s difficult when you get started, right, because when you’re started, when you’re starting off, you don’t have much of a track record and think it’s a really hard business to just start as an individual practitioner on your own. You know, I’ve done phone calls before with people that want to get into business brokerage and I tell them like, you got to get into an office with a good office with good people that you can learn from. So you can like learn through osmosis. And you need to get, become part of one of these organizations like IBBA where you can go and learn and get professional development and stuff like that. And, and, and then you have to figure out, you know, as you’re kind of, you know, what is that, you know, you jump out of the plane, you jump off the cliff and start assembling your plane. Like you got to figure out what kind of business you’re going to build. In North America, a lot of business brokerages have traditionally been geographically based. So you know, I sell businesses around my city kind of thing.

David C. Barnett [00:26:25]:
And in the biggest cities we sometimes get these siloed shops. So you know, a big city like New York, there’s going to be a broker who specializes in pizzerias or something like that, right. So you kind of get these narrow, siloed kind of business brokers. And over in the UK they’ve had that for a long time across the whole country because the country is relatively small. But I’ve seen a lot of brokers too who will do a couple of smaller deals and then they’ll say, hey, it’s just as much work to sell a million dollar business as it is to sell a $300,000 business. So I’m going to gravitate towards those bigger businesses. I personally, that, that can be a mistake for people because if you have an inventory of businesses that have an accessible point and you can actually get momentum or throughput in your, in your business where you can actually be selling like a business every quarter or every two months or something like that, then you can start to actually get a business that has a cash flow versus being a craftsman chasing sort of project based work. Right? So, so the, the, the broker who says, I’m only going to do these bigger deals, I’m going to do two or three a year.

David C. Barnett [00:27:41]:
You, you are, you know, Michelangelo, trying to find the next Sistine Chapel, right? Yeah. And, and that’s going to pay you for that. And it, it can be really Difficult and lead to that bumpy cash flow. Again, if you don’t need to earn the money, it’s one thing. But when I was in business brokerage full time, oh, geez, how old was I in 2008? I. I would have been, you know, 33 years old. So I had a mortgage, I had two young kids. Like I, I was trying to make it into a business that, that was going to be able to pay me a paycheck every two weeks.

David C. Barnett [00:28:15]:
And it was a good fight over three and a half years. But ultimately I was like, man, this is tough. Like, like it was hard to make a budget for, you know, for your household with this loppy, you know, roller coaster kind of cash flow.

Jason Cutter [00:28:30]:
Yeah, yeah. And it’s interesting when you talk about it because I hadn’t thought about that. Instead of going upmarket and going towards larger deals, because it’s just as much work, just cash flow, just a system, just if it’s a sellable business and it makes sense, just do deals and work on the cash flow. And then over time you can add more. Different. Go ahead.

David C. Barnett [00:28:54]:
Well, when I had my office, my policy was that, you know, people would come in, we would tell them what our process was. If they wanted to engage us, we charged them an upfront engagement fee. Was, was just like a couple thousand bucks. It really basically to make sure they were serious. We would then do an evaluation and then have a meeting to show them what we thought we could sell it for and what we thought was a reasonable deal. And my policy was that I would take on any of them as clients as long as they would agree to what I had put in front of them. So if I said, look, I think I can sell it for $229,000 and you’re likely going to have to hold paper on half of it because of the industry. No bank’s going to want to touch it, like, blah, blah, blah, blah.

David C. Barnett [00:29:34]:
If they said, yeah, let’s do it, that I would take them on. If they said, I want to list it for 4.99, I’d be like, I don’t have time for that. Like find somebody and then come back to me after a year when you, when you want to sell. And like, because one I would, I. It doesn’t many of those to learn that it doesn’t make sense to invest your time in something that can’t be sold.

Jason Cutter [00:29:55]:
Yeah, yeah. And when you do that or you just go for the bigger deals, makes me think of other industries and that I use all the time is Is whale hunting. Like especially you think of like tech sales and software sales and they want to go after the enterprise and they want to sell to Fortune 100 companies. It’s like that is okay if you have the patience and the budget as a company or an individual to get there. But you’re whale hunting. And the problem with whale hunting is that if you don’t get the whale, the whole village starves and dies. Right. Like you’re gonna go after the big trophy.

Jason Cutter [00:30:27]:
You better be able to sustain because it’s, it’s very to, to what you’re talking about versus like let’s just catch a bunch of fish constantly and just keep going. And if we come across a whale that’s great. Otherwise we’re not relying on it.

David C. Barnett [00:30:40]:
Yeah, yeah, I, I agree with you fully.

Jason Cutter [00:30:43]:
Yeah. So now, so shifting a smidge before we get into the other segments. So now like you said in the intro when you were talking about kind of your, your arc at this point, working with buyers, working with sellers, you know, what’s the, what’s trends you’re seeing, what are the things that you’re, you’re dealing most? I mean one of the things that comes to mind is, is a lot of the buy businesses for zero down. Oh yeah, Influencers. I was gonna say experts, but we’ll say influencers. We could say experts as well. That’s always there. It’s always a thing and it comes and goes.

Jason Cutter [00:31:16]:
But like what kind of things like that or else, you know, are you up against these days?

David C. Barnett [00:31:21]:
So you know, 10 years ago actually I just got a thing saying I, I had on YouTube for 11 years and so for the first five or six years I was on YouTube until about five years ago, I would put out a video, it would give very few views, some comments and then someone would send in an email saying, oh, I saw your video about this. I’m you know, 45 year old middle manager guy and I want to leave my business, leave the company I work for. And my dream is to buy a business and I think I found one. And I’m, I’m, you’ve got this home equity and I’ve got a good credit score and can you help me do this? And I’d be like, yeah. And that was like, basically I was talking to that person, the mid career person with resources who was trying to up level themselves in life and they realized the only place they would do that would be by getting their own thing. Or I was meeting the new person in the country who was a professional, maybe whose credentials weren’t recognized. You know, they were an engineer in the homeland, but now they can’t work as an engineer or, but maybe they could buy a business involved in construction and take advantage of their engineering knowledge. Right.

David C. Barnett [00:32:25]:
So it was basically those two kinds of people. And then about four or five years ago, I start to get all of these new people coming into my world and they’re fresh out of university and they’re like, oh, I don’t want to have a job, I want to buy a business. I’m going to buy a boring business or I’m going to do this or I’m going to do that. And then we got the zero down guru people coming into my channel space too. And that’s when I started to, to say, wait, there’s something going on here. And then I met my first, what I’ll call guru refugee. And it was a guy in Australia and he had paid like $5,000 at the time to take a course on how to buy a business with no money. And they taught him this whole process.

David C. Barnett [00:33:08]:
And then he went out and found three deals and he had reached out to me because he could not get a banker to say yes to any of his deals. And I just asked one question. I said, well, what’s your opening balance sheet debt to equity ratio? And he said, what? And I said, well, you know, if you’re going to buy a business, you’re going to have an opening balance sheet showing the assets you’re acquiring with the goodwill and then you’re going to have on the other side of the balance sheet, you know, the money that you’re putting in, what’s your debt to equity ratio? And, and he confused and I said, well, how much money are you putting in? He’s like, well, I’m not putting any money in. I said, okay, so it’s infinity to zero. Or like how would you express that? Like so, so I determine risk based on debt to equity ratios. And so if you don’t have enough equity, then the bank deems it too risky and nobody will ever say yes. And you know, so, so Heatha’s course, he had a money and money back guarantee. But this was like a year after he took the course when he’s finally meeting me and I’m teaching about how a banker is going to look at his deal.

David C. Barnett [00:34:09]:
And he, and he said, I spent a year, I’ve got these four deals, I found these sellers, I’m trying to do what they taught me. And you’re telling me it just can’t be done. I’m like, yeah, that’s what I’m telling you. And. And then I started to. Then I met my next one. And that’s when I realized, hey, there’s a problem here. There’s, there are filling these fantasies that, that people, nothing can somehow get something of great value.

David C. Barnett [00:34:32]:
It’s, it’s for nothing. Promise. Right? And so that’s when I started to create my very first videos on can you buy a business with no money? And I would walk through some of the things that other people were sharing online and I would show why it was nonsense, it didn’t make sense. And it was really a explosion in the followership. Like the, the YouTube subscribers really started to take off and people were putting links to my videos underneath some of these other people’s videos. And it really, you know, one of them was someone had sent me a video of this lady who talks about boring businesses in this Laundromat deal she did. And it was just absolute nonsense numbers. And so I made this video where I followed video step by step and I built a balance, an Excel.

David C. Barnett [00:35:21]:
And I said, well, this is what she’s describing as an income statement. Here’s what she’s describing as far as the assets, here’s what the balance sheet looks like based on what we know. And then I got into what depreciation of equipment, because she didn’t address that at all.

Jason Cutter [00:35:36]:
Right.

David C. Barnett [00:35:36]:
And I said, okay, so if you did this deal, you know, here’s the position you would be in and within this number of years you’d be replacing equipment while you’re still paying for the first machines you bought. And so would this deal actually be something that works out for somebody over a decade? And you know, the answer was no. And there’s a lot of content out there where, where you tell, I can tell anyway that the people that are creating the content really don’t have any kind of business experience. But what they’re great at is they’re great at creating these engaging, enticing videos. You know, 14 year olds want to swipe on and the algo picks them up and then they get shared in front of everybody. And, and people are kind of sucked into this thing. So, you know, the, the buy business with no money guru refugees would be a big thing that I’ve seen in the last couple of years. And then more recently the, the searcher crowd and search funds are real and it’s a real methodology.

David C. Barnett [00:36:36]:
There’s a few issues I have with it. So, you know, there’s a book called HBR Guide to Buying a small business. And I, I misnamed it really should be called the HBR Guide to buying a mid market business with the help of your rich friends. Because in those, those Harvard’s guys, in their mind, a big business is on like publicly traded company and a small business is one with like 30 million of revenue.

Jason Cutter [00:37:01]:
Right?

David C. Barnett [00:37:01]:
That’s what they call a small business. And so, so they’re talking businesses that have EBITDA of a million to 2 million to $3 million. And they’re talking about creating structures where you get some kind of investors with a preferred return, equity position, preferred shares or something, and you can then give them a preferred distribution ahead of your debt service. And then there’s still money left over to take your own salary. And then if you do this and pay down the debt and then buy out your partners, you know, you can eventually have this business. And it, it works just fine if the right business in the right industry with the right cash flow. And it’s got to be like one and a half nor plus of ebitda. And what, what’s happening is that people are consuming this sort of search funder kind of content and then they’re trying to apply it to, to a deal where there’s $250,000 of EBITDA and the numbers just don’t work.

David C. Barnett [00:37:57]:
And so, but the, but they don’t understand that at different parts of the marketplace the, the sort of stories, the methods, the mechanisms change. And so one of the, one of the, I always say when I’m talking to audiences of prospective business buyers is you really have to pay attention when you’re listening to something and find out what kind of business are they talking about on this show, what size of business, what is the revenue, what is, what are the earnings, the growth rate, what is the industry? Because if you’re, you know, talking or listening to people talk About High Growth SaaS Companies in San Francisco, and then you try to apply some lessons from that to a foundation company in rural Texas that has a lot of equipment and expensive gear like it. The, the lessons just don’t apply. They don’t cross over?

Jason Cutter [00:38:49]:
No, they, they don’t. Right. It just doesn’t work at all. And, and it’s interesting when I have my experience in real estate and then also the people I saw in real estate, you know, pre 2008 and all the strategies and all the things they would try to do, it’s like it doesn’t apply, it doesn’t work. Sounds good in theory, but it’s really hard to actually execute any of that. And so, you know, then it just makes me think like all of those buyers coming into the market trying to buy from those business owners, from the listings, from the business brokers, like just the time wasting or the challenges that it just creates with those, with the offers. Right, the attempted offers.

David C. Barnett [00:39:29]:
Yeah. And, and you know, I don’t know how old, just turned 50, but I think it was probably somewhere around 43, 44 is when I suddenly started to realize that my time left here was limited. And, and my time started to be really valuable to me. And, and I, it became much to dismiss things that were obvious wastes of time and it. So I mean, you don’t want to waste your time.

Jason Cutter [00:39:57]:
No, not at all. All right, so let’s transition into the next segment which is the business broker growth playbook. It’s the rapid fire tips. Now this is a, this is an interesting one because you just talked about all the, all the challenges for business brokers, the fact that you’re dealing with buyers and sellers. And I think this could apply to many different things. And you know, I’d love to still hear your thoughts on this because I’m sure you, you’re still involved, you deal with brokers. If you’re dealing with the buyer side, you’re, you’re, you’re helping, you’re, you’re engaged with brokers. But you know, what are, what are some ways you, you think, you know when rapid fire mode of ways that brokers can focus on their pipeline, focus on their growth.

David C. Barnett [00:40:42]:
I think that you should pick some kind of domain of business and become the person for that domain. So whether that’s some kind of service businesses, so you could say I’m the hospitality business broker in this area or I’m the manufacturing or I’m the value added wood products, you know, lumber kind of guy, what, whatever it is. Pick a space so that you can start to create content, even if it’s just like an article on LinkedIn or something like this where you can consistently talk to the people in that space and start to talk their language and talk about the things that they understand in their business that they’re concerned with so that they can see that you’re aligned and understand their business and then you make yourself a part of their industry events. You know, you become an associate member of their trade association or whatever, you go to their conference, that kind of thing. Pick a certain type of, of business that you know that as it’s where you are and, and make yourself the person does that. It doesn’t mean you can’t sell other kinds of businesses, but that kind of investment in business community pays off. Because what will start to happen is as you help one person or another, this the, the fact that you, the, the fact that you understand lingo and their business and their concerns and the fact that you know people they know have started to use you, it’ll just cement your business in that industry for a given geography or something. I interviewed a guy on my YouTube channel who was on the west coast as well and he was basically doing flood fire restoration businesses and he was doing them all over the Western U.S.

David C. Barnett [00:42:26]:
but he chose that industry and he would go to those events and he would meet the people at the, at the franchise brands were in that industry. And he was always saying like hey, like in your newsletter if you need an extra article, I’ve got a bunch of articles I wrote, I’ve written. You can, you know, he was just looking for ways to be helpful and supportive to, with the entire ecosystem so that he became sort of the known commodity for them.

Jason Cutter [00:42:50]:
I think that’s great. And I think one of the big things I learned this years ago is that when you try to be, you know, everything to everybody, it doesn’t work. People don’t know if they can trust you. They don’t know if you know what you’re doing. Even though a lot of it’s, it translates across all those, but it’s still in their minds and they also don’t know how to refer you if you’re, you know, everything to everybody. And so going into your next one, what’s the, what’s the next one you’ve got?

David C. Barnett [00:43:16]:
Don’t forget the business is done between people. So you, you’ve got to realize you cannot run this business from behind a computer screen. You, you, you have to have enough to go and, and put hands together with Nelson and, and be physically present.

Jason Cutter [00:43:33]:
Are, are you seeing because you’ve done this for some time, you know, brokerage and then now what you’re doing. Do you see people trying more and more to just stay behind the, the keyboard?

David C. Barnett [00:43:45]:
Yeah, I’ve also, I’m seeing more think that they can automate the sale process of selling a business like any other kind of sort of customer fulfillment find online. So I, I’ve actually experienced with one of my clients where they, they basically completed one of these DocuSign kind of NDAs online and by completing it, it triggered automatically an email sim to arrive. Now what that means is that the buyer now has got the SIM in their hands and they’ve never met the broker in person, they never met the seller in person. You know, nobody’s had an opportunity to actually meet them or check their id. Like, do you see where I’m going with this?

Jason Cutter [00:44:28]:
Yeah.

David C. Barnett [00:44:28]:
Like we don’t really know who, who the buyer is. And, and the other problem, this is that business deals are made between people that trust each other. So when I was taught how to be a business broker, I was taught that you give the buyer very basic information about the business. You know, here’s the revenue, here’s the earnings. You know, just top level kind of stuff. If this is something you see yourself buying, let’s get together and meet the seller. And now the buyer and seller can meet each other and the seller can decide if they think, think this person could take over the business. And the buyer gets to hear the stories about the business directly from the person selling it.

David C. Barnett [00:45:05]:
And my failure rate in those meetings was about 50%, meaning about 50% of buyers, after meeting the seller and having a face to face conversation about the business, would eventually say, oh, this isn’t really what I thought it was, and they would back out without having seen the sim. Okay, so again, we’re protecting private information. The buyers who say, yeah, this sounds great, they now are forming an emotional attachment with the business and they’re starting a relationship with the seller and they’re starting to imagine what it’s like to be the owner of the business. You then hand them the sim and you say, here’s more information about the business. So what’s, what’s the difference between the, in this, in, in the scenario where buyers are going to look at that sim and if they find any problem with their business, they’re going to say this is a problem and they’re gonna, they’re gonna create that problem should prevent them from buying the business. They’re gonna see it as a reason not to buy. If they’ve already started to become attached to the business and they can imagine themselves running it and they think it’s an ideal scenario for them, then you give them the sim. They’re gonna see a problem in the SIM as an opportunity to improve the business once they’re the owner.

David C. Barnett [00:46:12]:
I mean everybody, everybody, everywhere engages in a transaction either to satisfy an emotional need or to avoid pain or suffering. Yeah, and there’s, there’s very few people who have business to avoid pain that, you know, it, it does happen. It’s, it’s usually people who have some kind of barrier to the employment market. So you’re, you’re a new immigrant, you speak the language. You need to buy a corner store because it’s the only place you can run without speaking English, for example. So that does happen rarely. Most of the time people are buying a business because they see themselves as being more than they want to level up, they want to achieve more in life. They, they want to prove that they, you know, do more, build a business, etc.

David C. Barnett [00:46:56]:
And, and so they have this need and, you know, the, they’re only going to complete it if they believe they can trust what they’ve been given. And ultimately the source of all information is the seller. And the seller is the one who’s going to have to train them and do the transition and coach and help them through to become the owner and be successful. And so if they don’t feel that they can trust the seller, if they don’t feel that that person’s going to deliver for them and that person isn’t honest, then they’re not going to do the deal either. So it’s, it’s like in, in real, the buy. The, the, the two agents in real estate do whatever they can to keep the buyer and seller apart, to keep it in, in. To keep it impersonal.

Jason Cutter [00:47:40]:
Right, right.

David C. Barnett [00:47:41]:
In business brokerage, you, to build a relationship, you have to make sure the buyer and the seller are actually getting to know each other so they can trust each other. Because without trust, no deal can ever happen. Or the buyer will, will try to create a deal in which every single threat they see has been addressed through some kind of clause or technicality or price reduction in the deal. And so in order, you know, we have to build the relationship. And so this is one of the things I see happening. And I, I just shake my head and I’m like, these guys don’t even understand fundamentally what their job is as a business broker.

Jason Cutter [00:48:19]:
Yeah, yeah, they’re just trying to scale. They’re just trying to create efficiencies. Either they’re doing a lot of transactions or they think the efficiency is what’s getting in the way of them closing a deal. Right.

David C. Barnett [00:48:33]:
Yeah.

Jason Cutter [00:48:34]:
So what, what else on the, what else on the, on this rapid growth?

David C. Barnett [00:48:39]:
You know, I think that the last would be things that are old maybe worth looking at again. Back when I was a business broker, I actually used to go around industrial parks and things and I would have these little car cards, these little invitation cards printed up that would say, hey, my name is David, I’m a business broker. I’m Working with buyers looking for a business like yours. If you’ve ever been thinking about selling your business, give me a call. And I would have them in little envelopes and I would use painters green tape. And I would go around on a Sunday night when everything was closed, and I would just tape them to the front doors of businesses in the industrial park. And whoever got there in the morning would, they would say, you know, for the owner confidential on it. And whoever got there in the morning would throw it on the boss’s desk.

David C. Barnett [00:49:22]:
And I, you know, it worked. And today nobody’s getting any mail. Nobody’s getting anything outside of an election. You know, nobody’s getting any mail, and everybody’s competing like crazy to buy leads online. I think it’s probably worth the effort for people to take a look at some of these older techniques of, of promotion.

Jason Cutter [00:49:41]:
Got it. I love that. I think, I think it’s great. I think it’s, it’s interesting how that stuff back, you know, things like direct mail, things like, you know, relationship building where, you know, people want to go so far one direction and then it just comes all the way back. Now let’s, let’s talk about the, that got away. You have a lot of experience in the ones that got away in the past. You see a lot of deals now. Anything jump out as an example and kind of a cautionary tale or lessons learned from that, from, from a deal.

Jason Cutter [00:50:11]:
Painful, you know, painful. That it?

David C. Barnett [00:50:13]:
Yeah, I can give you two, two examples. So one of the listed for sale when I started off in business brokerage in 2008 was a fried chicken franchise. And I sold it three times over the course of my career. But the first two times I sold it at the 11th hour, the deal fell apart. And it was actually the last thing I sold at the end of 2011 before I decided to leave the industry. And so it was, it was the deal close. All three buyers would have been excellent buyers. The, the first two, like something outside of, of the core negotiating party happened that caused the deal to fall apart.

David C. Barnett [00:50:54]:
But the seller said to me afterwards when he, you know, paid the big check, he’s like, oh, look at you. You got, you got, you know, $60,000 in your hand. That must feel great. And I looked at him and I said, look, the person who works at the front counter for you taking orders has earned more money since I’ve met you. And it was absolutely true. Right. Because this thing had been on my desk for three years. Wow.

David C. Barnett [00:51:17]:
So that’s, that’s one that I like to tell people, especially if they’re thinking about getting into brokerage. But a story that happens about the one that got away all the time amongst my, my buyer group, the, the group that I is that we will figure out what is a reasonable offer from the buyer’s point of view. What are they willing to pay for a certain deal and they’ll make an offer and the seller wants more or wants different terms or whatever. And it takes a lot of discipline for the buyer to say no. That doesn’t work for me. And I’m always telling my buyers that the only point of leverage a buyer has is a willingness to not do a deal. And it is really surprising to me how many times this happens where no deal is had and then 8, 10, 13 months later, they’re talking again and they make a deal. And, and so oftentimes what we chalk it up to is sellers not having realistic expectation.

David C. Barnett [00:52:15]:
They need to maybe go meet some other buyers who also won’t do what they want before they actually realize, hey, you know, some of these offers are reasonable and I should probably, probably do a deal. But you know, I, I will often say, like, deals could all have been done earlier if the seller’s expectations had been more, more properly aligned.

Jason Cutter [00:52:35]:
Yeah, I, and I, I hear that and I see that a lot. I think that’s true in sales. There’s a lot of things in sales that’s. It’s similar no matter what you’re selling. In this case here, I think it has a lot to do with that. And again, kind of going back to what we first spoke about, and a lot in the beginning is where the business broker financial model just get the listings versus be picky. And it’s better to turn down ones or set expectations and just like put it aside until that person’s ready. And just how much effort, you know, again, your fried chicken commission, if you take the commission and you divide it by the number of hours spent over however long it takes, was that a good deal and a good use of time? Time, it’s probably not, you know, for, for some of those bad deals.

David C. Barnett [00:53:22]:
Thankfully my calculator’s too far away here.

Jason Cutter [00:53:27]:
Don’t do that. Matt. That, that would be terrible. If you think of whatever portion of three years you spent on that deal, it doesn’t matter how much time it was, it would be bad. So, David, I appreciate you being here. This is, this has been fun. Again, you’ve been in the business broker, now you’re not. Now you’re working with buyers.

Jason Cutter [00:53:43]:
You’re working with sellers and, and kind of more in that mode. And it’s some, some good information, some good nuggets, some good cautionary tales, maybe, maybe some good signs to do something different if struggling or you know, figure out some gaps and, and things to do other than automating everything. Definitely be careful with that. For audience, for people tuning in, they want to find out more. I know they can go to David C. Barnett with2t’s.com so it’s D A V I D C B A r n t t.com they can also email you dbarnett alpatlantic.com you’re on LinkedIn. You reference it several times. We’ll have it in the show notes.

Jason Cutter [00:54:21]:
But you’re on YouTube and so you have a good channel, lots of content, lots of activity on there. David, appreciate you being on the show and sharing all this.

David C. Barnett [00:54:30]:
Awesome. Thanks Jason, so much. It’s been a great conversation and good luck with the podcast. I know it sounds like you’re having some great guests. I’ve seen some other people on LinkedIn share that they have been on the show, so I’m looking forward to tuning in.

Jason Cutter [00:54:43]:
Yes, thank you for being here and we’re excited as well. Just doing what I can. It’s interesting I told you this when we first started is that, you know, the vision of the show has gone from just helping brokers with their marketing, their pipeline, but also now being more about helping the good and great brokers succeed and really helping those ones build a business that works and is successful for helping other business owners exit and is really the mission and focus now with the show and with what we do. And for everyone tuning in, make sure to subscribe, make sure to follow us on all the places. Again, all the links will be in the show notes. And until next time, stop hoping for deals and start growing your pipeline.