Don't Start a Business, Buy One: The Greatest Wealth Transfer in History

A revision — and a book

Daniel: Welcome back to the Blueprint Finance Podcast. Rory and I are doing a bit of a revision of one of our most popular episodes from last year — because we barely scratched the surface. It was one of the longest of the year, and it's with my older brother, Brandon Lipman. It's timely, because mainly we want to dive deeper into purchasing a business, business growth, business acquisition — the things we didn't have enough time to get our teeth into last year — and how we're structuring some of these deals in terms of financing them. Brandon, mate, welcome back.

Brandon: Look, you get me whenever you want me.

Daniel: We've been trying to get you all year — you're a hard man to pin down. And there's a massive development: you've got a book coming.

Brandon: Yeah. It's been real fun writing it. And the topics in the book are essentially what we're going to cover today. It's called Speed Running Capitalism Through Buying Boring Businesses. It takes the concept of buying businesses and works it into the concept of capitalism — a little bit of philosophy about how business acquisition fits into that. Normally you think property, funds, shares, financial products, even crypto, as a way to get ahead. But because there are so many more businesses coming up for sale over the next 10, 20 years, we're going to have this new asset class that fits right into capitalism. And personally, I believe it's the best way to grow and build wealth. So I build the case as to why, and then the strategies, planning and tactics afterwards.

Daniel: How long has it been in the making, and when can we expect a copy?

Brandon: The book's done — I'm doing the final edits now, making it sound more like me than an encyclopedia. I'm hoping by the end of April.

Rory: Just make sure when you do the audiobook version, you stick to the pages — because this guy sends me 10-minute voice notes.

Brandon: I get on the thought train, and I just have to send it. What I've started doing is sending a text note underneath about what the voice note's about, so people know how to prioritise it. It's terrible of me to demand 10 minutes of someone's time without a heads up.

Daniel: Before we get into it — what have you been up to? Acquiring businesses, working on the ones you've got, focused on the book?

Brandon: Predominantly book-focused — it's a valuable thing I want to get out so people have a great starting point. By no means am I going to be the greatest at it, but it'll at least start people having the conversation about buying businesses and how that fits into growing their wealth. Beyond that, we've been managing the portfolio. You've met Reagan, our asset manager — we've been managing everything in New Zealand, and we've now set up in Sydney and Melbourne for one of our rental equipment brands. So we're growing in Australia, looking for targets there, and we've got a couple in the industry we're looking at here too. It's the dating game — finding the right targets, and potentially raising a little money for it as well.

The greatest wealth transfer in history

Daniel: You mentioned the opportunity over the next 10 to 15 years. You're specifically referring to the baby boomer retirement exit — a lot of these people selling their businesses now?

Brandon: Definitely. "Baby boomer businesses are coming up for sale" — that's the headline, it sounds punchy, and people all over the world are preaching it. But it's broader than that. There are people who aren't necessarily baby boomers — the generation between boomers and millennials, Gen X — who are having different ideas about how they spend their time. They're thinking about longevity, realising the stress of owning a business might not be for them for the next 10, 15, 20 years. They want another crack at business too. I think the days of a 20- or 30-year business-ownership career might also be over. People want to trade them, sell them and move on. And they're all going to come to the market — so it's a matter of who's ready.

Rory: Why are you so bullish on buying a business over starting one from scratch?

Brandon: The principle is so basic. Business is fundamentally a resource game — you need a whole bunch of resources to produce revenue, take care of business, and bring home a profit. So if you start, you're saying you believe you can gather the resources quicker than it would take to repay the money you put in to buy the business in the first place. A business is a collection of people, processes, systems, customers, assets, location — there's a heartbeat to it. That all needs to be established for it to run. If you buy it, that job's already done. You get a huge head start.

Rory: There are negatives, though — you inherit a lot. Expectations the previous owner set, bad stuff you might not know about. Predominantly the riskiest part is taking on debt.

Brandon: Exactly. It's the most volatile asset class you can participate in — but because of that, it's the highest ROI, and it can afford you the greatest life. The reality is there's no perfect business, so you're going to buy something that brings you difficulty. It's not like you walk into a business shop and pick one off the shelf — it's very hard to return a business. Once it's done, you're left holding it, with all the obligations. So leverage can be the most dangerous thing, because that's what sets off the cascading negative effects. Normally if you don't have enough money, IRD doesn't get paid, and when that goes on long enough they come knocking — and it pulls in everyone else you owe. By the time that happens, you're already off the cliff. You just haven't realised it.

Buy with the exit in mind

Daniel: When you're buying a business, you have to already be thinking about the exit, right? You can't just pay yourself whatever's left at the end of the year. You need to make it marketable from the start, so that in 10, 15, 20 years when you sell, you've actually got a business — not just a lifestyle business built around the owner.

Brandon: As a buyer, the first thing I look at to assess what I'm going to go through as the new owner is the lifestyle — I start with the lifestyle the current owner has. Because all you're really doing is swapping places with the owner, assuming you don't change anything. You can have all these ideas about what you'll change, but the results aren't certain until you've done them. So whatever state you buy it in, that's the state you have to accept it in — you're rolling the dice on any positive change you want to make. That's one thing you can get oversold on: a memorandum is a long-form sales document, and it'll say you can increase the marketing, change this, change that — all easier said than done. From a pragmatic perspective, you have no evidence any of it will benefit the business. So I look at the lifestyle and ask, is this something I'm willing to accept in its current state? Because you could be sitting with this business for 20 or 30 years.

Rory: Can you expand on the lifestyle of the owner? What specifically are we talking about?

Brandon: All of it. Are they spending plenty of time with their kids, their family? Going overseas? Or are they doing 90-hour weeks and suffering health conditions — because the business can be the precursor for that. I've sat opposite plenty of people selling their business, and there are two camps. There's the person who's chill, comes in, does the work — maybe 20 hours, or a light 40 because they love it — nice vehicle, time overseas, time with family, no clear signs of stress. And there's the other side: "I'm selling because this business is killing me." Those cues are far too obvious to ignore. You're trading places with that person — if they're suffering stress-induced health conditions and you don't change anything, that could be you.

Daniel: And the less an owner impacts the business, potentially the more valuable it is?

Brandon: At that point you've actually got a business — as opposed to a glorified job where the owner is shouldering all the responsibility solo. If you're the one doing all the work, you're not selling a company, you're selling an obligation. So anyone preparing a business for sale wants to make sure they've done everything so the next owner can step in and own it, rather than be owned by it.

Rory: So it's putting yourself in a buyer's shoes in advance — how much time do I actually spend, how much revenue depends on me being around, are my roles so specific I can't be replaced?

Brandon: Exactly. And that's one of the easiest things for an owner to fudge, so you really have to look at calendar management and understand what they're doing at all times during the week. If staff aren't doing the actual management tasks, then the owner is.

Always be ready to sell

Rory: This long-term, exit-in-mind mentality — where did that come from?

Brandon: One lesson I learned from a gentleman who ran a big logistics company. We were in a meeting talking about a mortgage, and he ushered me out because he got a call from a guy who'd always been calling saying, "I want to buy your business." Afterwards he pulled me aside and said, "I'm sorry I was rude — but you always have to be ready to sell. You never know when the right moment is, and that moment doesn't arrive very often. If you're not ready for it, you can't take advantage of it." A lot of current business owners think selling is as simple as taking it to a cash converters for business — you throw out a Trade Me ad and imagine all these people want to buy it. From a market perspective, a buyer in theory could buy any business, but the seller only has one to sell. So who has the advantage? The buyer, every single time. What's interesting is buyers aren't empowered — they don't see the advantage they've got, so they can be told by brokers that they're the ones in a weak position, when really it's the seller. So when you own it, you're holding something very difficult to sell — you have to make it very attractive to buy.

Rory: Do you know any numbers around the market — businesses for sale versus buyers?

Brandon: They're loose. But one stat you hear colloquially is that 80% of businesses won't sell. And of the ones that do, it takes nine to 12 months on average. To put that another way, it's like you've got a one-in-five chance of getting a date to the school ball — but you only find out in nine to 12 months. So if you want to take someone, you've got to plan in Year 11.

Daniel: Is it really true 80% never sell?

Brandon: That's from general listings — a lot of them are very small companies that are difficult to sell in the first place. I'm not saying one in five businesses is worth buying — that's not a stat to work with. But the quality ones definitely sell. They don't hang around. You just need a quality business in the first place.

Rory: Even property can be tough to sell, and you've got comparable sales. Imagine a market where lending's not as straightforward and there are so many variables. So thinking about all of that on your way in, when you take on the obligation of being an owner — how am I going to make this a sellable business — is massive.

Multiples and what drives value

Daniel: When you look to sell, there are multiples to consider. People talk about valuing a business at three or four times the multiple of EBITDA — earnings before interest and tax. Why are different businesses able to command higher multiples?

Brandon: There's a lot of context. When I talk about business valuation, I'm talking about businesses with, say, $200,000 up to a million dollars in earnings — within that range you can pretty much work to a multiple. It isn't as much of a voodoo act as people think. You're buying a volatile asset, full stop. You can increase the multiple you pay based on a reduction in the risk you're taking — that's the headline. If it's less risky, you can afford to pay slightly more. There's no such thing as "this business is in an in-demand industry, so the multiples are higher" — those are sales tactics. I've seen listing prices more than halved. So it starts with quality. What makes a business high quality? Diverse customers, established ways to hire and train staff, systems and processes — all the stuff people say is boring that you need so the company can run. A higher profit figure or better cashflow. And some level of management that puts a line between you as the owner-operator and the business being managed by other people. If you have those things, you can push the multiple higher. As it gets lower, it's hard to justify paying a high multiple for a business that's actually got a lot of risk.

Daniel: Does the type of income affect the multiple — say, a subscription business?

Brandon: There's value to that, because you know it's repeatable, and you've normally got a lot of people paying the same amount — so it's diverse customers. You want diversity within every part of the business: diverse customers, diverse ways to get them, diverse people to hire, higher income, and someone to help manage it. That's the mecca you're trying to reach. And you're never going to find something perfect. You might have one customer making up a substantial amount of revenue, but it should never be overweighted to that customer. Look at Fonterra — China is such a large customer that it's probably New Zealand's biggest risk. You find those same scenarios in smaller businesses too.

Daniel: For listings where the price looks too good to be true, what are the red flags on the P&L or balance sheet?

Brandon: You want a good accountant — there's a topic called quality of earnings. A quality-of-earnings report looks at the revenue, how it's obtained, and establishes the quality of it — is it consistent, from diverse customers, how it's sourced, whether it reflects the right reporting period. The key one is always consistency. Things being out of kilter — a really large expense, a big unexplainable drop or spike in revenue. A consistent business over four to five years is worth its weight in gold, and that's another driver of the multiple: consistently doing the same thing, diverse customers, systemised, high profits, management in place.

Raising capital versus going solo

Rory: You mentioned the risk of debt, your expansion into Australia, and potentially getting investors. What's the investor pool like, and how do you make that attractive if you want to avoid the risk of debt?

Brandon: First you have to find the right people — aligned with the journey you're on. What you don't want is what I call love money: going to people who love you to ask them for money, because that's typically not a business decision and there's no skill in shelling it out. Instead, you can offer that seat to someone skilled, who's run the race before, who's going to be more of a coach. Those are normally people who've owned and sold businesses before — so it makes sense to find someone who wants to go on that journey again, but not in the driver's seat. Like a mentor — the Hunger Games has the mentors. Someone who can see the road ahead, narrating it for you.

Daniel: Our market — real estate — is very impacted by trends, economic movements, unemployment, interest rates. Do we see that even more so in the business market? And does that mean there are good deals right now?

Brandon: People are flocking to look at businesses for sale, and that number's naturally going to grow, because we're entering the golden age of this wealth transfer. From an economic perspective it's hard, though — we haven't had a good economy over the last few years, which means when you turn in your report card, the P&L and balance sheet aren't looking too flash, so you won't get the valuation you'd hoped for. People who can stay over the last seven or eight years, continue to hold and draw profits, and have built something to go the distance might be two or three years from their exit. Someone on the ropes, desperate, who wasn't prepared, can't weather economic storms. That's why you want a medium- and long-term view of both buying and selling.

Daniel: Is there a benefit to taking on a non-active shareholder's money?

Brandon: Definitely — it lets you punch up a couple of weight classes. The route I took, I did everything off the back of an oily rag — my first few deals were no money down, buying small, crappy little assets trying to make a big business. It was quite difficult. How I could have done it faster was raising a little money from a private investor or equity partner, then buying a slightly bigger business and starting with a really solid base. Our last deal, that's what we did, and it was a dream — get into a new industry, something solid you can bolt other things onto. Night and day compared to going solo, no-money-down. It can be alluring to do it yourself, but with the right investor and the right team you can punch up and buy great stuff — and you just have peace.

Daniel: And that's where you're at now in your personal business — you've got a successful model and you're looking to expand. It's a much easier pitch.

Brandon: Exactly. The formula works here, let's take it over there, bigger market. It's one step at a time — being fearless and making mistakes. The big mistake is the knockout punch: when you get caught with no money and several bad things happen at the same time and you can't play defence.

Rory: The old boys call it losing your shirt.

Brandon: I've not heard that — but that's exactly it.

Playing offence and defence

Rory: So the idea is that when you focus on expansion, you're never staking the whole thing — never stretching to a point where one wrong move sends you bust?

Brandon: It's the concept of moving half a step slower than you think you need to, and knowing when it's time to throttle it. That's where we got to — off the back of a pretty average few years in the New Zealand economy, we had a bit of money and thought, maybe we don't go buying just yet. We go for organic growth and rip into Australia. It's a way to get a higher ROI on our capital but also play defence — we're not staking everything, we're doing something we know works without needing to raise money. You look for strategies that hit two birds with one stone: offence and defence with one small decision, taking very calculated risks, and never getting left with no cash in the bank. The biggest risk to any business is cashflow — most businesses are horrific with it. When you finance a business with bad cashflow and it takes a couple of cheap shots, you've got nothing in the account, and it can cost you the company. A great way to self-insure against bad things is just having cash in the bank.

Daniel: And the pathway to keep growing — if you buy another company, you're not taking money out of it to service your livelihood, which changes the playing field with banks because they're no longer factoring in personal income coming out of that second business.

Brandon: Once you get over the first one, what I normally suggest is keeping all the cash, really not paying yourself, for maybe two years. After a two-year cycle, you've got the business under control — you understand the cycle, you know what a year looks like, you can deal with an average year. Then you've got money in the bank and you can go buy another business, having understood the mistakes you maybe made on the first acquisition. If you buy a good business, you're buying cashflow.

Daniel: Often we'll meet property investors who've found a deal and ask how to finance it — and we say, hold the fort. We sit down, do a strategy session, and ask why they're actually buying it. You realise they've got equity and they just feel a need to deploy. But that purchase might just screw their cashflow up, or it's not the right move for what they're trying to achieve. Investors and entrepreneurs often feel the need to keep growing, or to grow out of an unsatisfactory position — and that's the wrong time.

Brandon: Speaking specifically to business acquisition, the main thing that draws you in is the money — the yield. You can buy a property for a million bucks, or a business for a million bucks, and look at the difference: you can hit a 50% yield on a business versus maybe three, four, five on property. So the yield conversation attracts you to business, but money can't be the main driver. A business can tactfully get you into rooms you couldn't get into before — you'll meet people you otherwise wouldn't. If you know why you're buying in the first place, you can think tactfully about what kind of business you buy, based on the life it gives you and the people you'll meet.

Financing business deals

Rory: Let's address the 95% of listeners with no Rich Uncle Mortimer in London leaving them 10 million pounds — they've got to figure out how to finance. How do business deals actually get financed, compared to property?

Brandon: It's a very different world. People love property finance because it's such an easily transactable asset — comparable sales, agents love selling them, people need to live in them. So against property, that's the cheapest rate you'll get, and it doesn't have other adverse risks.

Daniel: Now talk about business ownership. Even if you've got a property to lend against, your rate's still going to be expensive. Why?

Brandon: You're taking a lot more risk. The bank won't know whether you pay GST or your tax on time, or what other debt could be cooking. You can sign all the agreements that you'll report, and banks will ask for more frequent reporting — but more obligations can come out. They're not just insuring against the million you're borrowing, but maybe another two or three hundred thousand you could tick up elsewhere based on other activity. They don't know if you're a cowboy. So they price it accordingly. But over time those rates drop, and they can start relieving you of things like the personal guarantees you have to give going down the bank route.

Daniel: That's exactly how banks view self-employed borrowers, too. When you start out, it's a tremendous undertaking for the lender — they're taking all the risk, which is why it's priced so hard, and why getting finance to start a business is very hard to get. But once you've got two years running and they see you're doing well, the tables turn. There are lenders happy to do unsecured lending — a GSA, a general security agreement on the business.

Brandon: And why is that? Because if you eliminate the operator risk — if you buy a good business you don't need to change, with evidence it's continued to perform and no glaringly obvious future risk — and if you perform and don't take money out, you should be all right. The issue is just in the things you don't see, which the bank doesn't see either. But if you're a set of hands the bank can trust, they'll want to keep funding you and make it easy to borrow. You crack into a whole different area of the bank's vault when you're a business borrower.

Daniel: What sort of rates are we talking?

Brandon: Most people I know borrowing for business at the moment are sitting plus or minus a little bit on eight with a main bank, secured by the business, no other assets. That can go down or up. When we started our banking relationship, rates came down. I floated some ideas about securitising it with real estate, and our banker said, we can bring you onto mortgage rates and move away from security as long as these metrics are met. So relieving personal guarantees and bringing rates closer to mortgages is possible — just not off the rip.

Daniel: As a rule of thumb, if you throw a property into that 8%, you can get it down about 2%.

Brandon: I'd say borrowing for your first business is one of the most dangerous financial things you can do in your entire life. I want to make that abundantly clear — we don't want it to sound like two brothers chatting, like it's all fun. You want to make it not a dice roll. You want the odds in your corner, the most calculated risk you can take. But you're playing with fire — you have to give it the utmost respect. You can't get high on leverage. That's why I say if you're planning not to take money out of the business — people might think that's barbaric — you're self-insuring against one of the most dangerous decisions you can make, to give yourself the best possible chances of upside.

Rory: It reminds me of what our investment adviser Jono always says — taking risks and investing is expensive, but wait until you get the bill for not investing.

Brandon: Exactly. Everything is a risk — your salary job, pursuing a career you don't like, your income not being where you want it. Calculated risk is the number one thing. If you have an eye and a plan to learn through the journey, and you don't tie it to money — don't put the money thing on the table — then even if you lose everything, you can come back and go twice as hard. As long as you don't give up, you can't lose.

The one KPI

Daniel: Say we've financed the business — we're in. For anyone buying small businesses to improve them, you look at systems and things you can change to improve the profit margin. What's the key KPI you jump into and think, if I improve this, I'll change the business?

Brandon: There's only one — and it's whether you can find another business similar to it that you can buy. Because you grow the size of a business by buying a business. If you're in an industry where you know you can find another target, you've taken a pathway where you can self-insure growth. That's the KPI. When you own it, you keep looking. You find another business similar enough that it can operate tangentially — a competitor, a supplier, a customer — in an industry with a lot of similar businesses. Map out what running the two together looks like and what you'd need to change. Then, over and above marketing, winning a new client, all of that, you have a higher likelihood of growing the business by the size of another business. Focus on that, and keep everything else the same.

Rory: But you said you're always buying some problems. Are there problems that aren't so bad — that you can turn the crank on — short of buying a second business?

Brandon: My favourite is finding out the gross profit margin. Gross profit is the number left over after all the expenses you incur to do the thing. Say you buy a gadget for one price and sell it for another — you've got all these expenses to deliver it, and the money left over is one of the most important figures in the business. Use something basic — office cleaning. You know the average office takes four hours to clean with two people, so eight hours, plus the cleaning products you consume. All you need to do is figure out how to charge more for the service or pay the same to deliver it. Every dollar you increase that number by flows straight through to the bottom line. A really lazy way is just to increase your prices — if you sell a thousand things a month and raise the price 10 bucks, that's another $10,000 to the bottom of the P&L if nothing else changes. You might lose some customers, but typically those are the ones you don't want anyway — so you make the same money doing less work. I've got maybe another nine of those — so that's teeing up a third episode.

Wrapping up

Daniel: We said we'd keep this under your HYROX time — which was 40 minutes, if anybody's wondering. Mate, thank you so much for coming on, and we're so excited for the book. It'll summarise everything — no pun intended, it'll be the blueprint for a lot of people. Because we're speaking to the future of our nation — these are the people who are going to be employing others. We want to be known as a place where people can come to explore their options. So if people have businesses they want to buy or want some advice, feel free to reach out to us — and the book will be a great place to start.

Brandon: We'd love to hear from you. If anyone has questions, they can ask me on Instagram — keep it easy, I'm not selling anything.

Daniel: And you'll send them a nice long voice note with a little instruction list underneath.

Brandon: They all know it, man. I love the game. It's a pleasure being here.

Daniel: Cheers, mate. Thank you.