How my college roommate bought a $3.4M Business For $200K

Key Concepts

• Buying a business vs. starting one
• SBA loans and seller notes
• Due diligence and the search process
• "High excitement, low knowledge" to "low knowledge, low excitement"
• The "secretary problem"
• "Don't buy a job"
• "Fun to run" businesses
• "Trouble is opportunity"

Introduction

The episode features a conversation with Dan, who recently bought a packaging distribution business, Fleet Packaging, after a career in tech. The discussion covers his journey, from initial skepticism to successful acquisition and growth, offering practical advice for anyone considering buying a business.

Dan's Background and the Genesis of the Idea

• Dan's background: Duke Spanish major, coding academy at Facebook, Engineering Manager then CTO at a startup (Namely).
• After Namely was acquired, Dan had a conversation with Sean who suggested buying a business instead of seeking another corporate job.
• Sean pointed out Dan's entrepreneurial tendencies, citing examples like his lifetime supply of Stride gum won from a contest and his attempt to get on Wheel of Fortune.
• Sean suggested buying a business as a "cheat code" because it's already validated and profitable.

The Business Acquisition

• Finding the Business: Dan found Fleet Packaging through a broker on business marketplaces.
• The Business: Fleet Packaging is a packaging distributor that works with large retailers in the US, providing bags and related services.
• Financials at Acquisition: The business was doing $8-11 million in revenue and $800,000 in profit annually.
• Purchase Price: $3.4 million.
• Financing:
  • $200,000 down payment (house on the line, savings, and a 401k loan).
  • $1.8 million from an SBA loan.
  • $1.4 million seller note (forgivable if the business underperforms).
• Current Performance: The business did $13.8 million in revenue and $1.7 million in profit last year.

The First 100 Days and the Search Process

• Initial Steps: Dan started by researching search funds, entrepreneurship through acquisition, and different funding models.
• Community: He found a community at searchfunder.com.
• Looking at Businesses: He looked at hundreds of businesses, starting with headlines and then requesting confidential information memorandums (SIMs).
• The "Secretary Problem": Dan applied the "secretary problem" to his search, aiming to evaluate a significant portion of the market before making a decision.
• Example: Sausage Company: Dan got close to buying a sausage company doing $10 million a year, but it had one huge client with no contract.
• LOIs: He was under LOI (Letter of Intent) three or four times but didn't close those deals. LOIs are more like a "first date" than an engagement.
• Memos: Sean advised Dan to write a one-page memo for each deal, outlining the business, its current state, reasons to buy or not buy, and potential risks.
• Example: Clover App: Dan considered buying a business that made apps for the Clover point-of-sale system, but it was too niche and lacked growth potential.

Key Lessons Learned

• "Don't Buy a Job": Avoid small, cheap businesses that require all your time and effort. Instead, aim for larger businesses that can become assets.
• Don't Rush the Search: Avoid fatigue and stick to your principles.
• AI Headwinds: Be cautious of businesses vulnerable to AI disruption, like SEO companies.
• Clean Finances: Fleet Packaging stood out because its finances were clean and the story was tight.
• The Importance of the Seller: Dan had an instant connection with the seller, who was honest and standup. They even shared a tartufo.
• Due Diligence: The due diligence process took four months.
• Shadowing the Seller: Dan shadowed the seller every week to learn the business and validate his assumptions.
• It's Not Easy: Buying a business is hard work and takes time.

Dan's Advice and Perspective

• Calculated Risk: Dan is a risk taker but a calculated one.
• Minimum Viable Salary: Dan takes the minimum salary needed for IRS compliance and reinvests the rest in the business.
• Sean's Advice: Profit First: Sean suggests taking a set profit margin out of the business to force profitability.
• Sam's Perspective: Buying a business is a good fit for serious, detail-oriented people willing to do the diligence.
• Entrepreneurial Spirit: It's best suited for those with an entrepreneurial spirit who thrive on being in control of their own fate.

Business Ideas and Opportunities

• "Fun to Run" Businesses: Dan is interested in businesses like laser tag, bowling alleys, and climbing gyms.
• Family Entertainment: These businesses are often wildly profitable, have low labor costs, and cater to a growing demand for sober events and out-of-home experiences.
• Commercial Real Estate: Repurpose old malls and commercial spaces into entertainment venues.
• The Least Sexy Businesses Possible: Consider unglamorous businesses like medical ambulances or funeral homes, where there may be less competition.
• Trouble is Opportunity: Look for opportunities created by businesses going out of business, like Party City.

Sabi Sushi: A Cautionary Tale

• Dan and Sean's first business was Sabi Sushi, a Chipotle-style sushi restaurant.
• They created a 250-page business plan without validating the concept.
• A meeting with the founder of Noodles & Company revealed their lack of preparation.
• John Prendergast, a Boston Market owner, advised them to test the concept with a delivery-only service.
• They learned that there was limited demand for their concept outside of major cities.
• They also learned to see problems as opportunities for innovation.

Conclusion

Dan's story provides a realistic and insightful look into the world of buying a business. It emphasizes the importance of due diligence, financial planning, and a willingness to work hard. While it's not a "get rich quick" scheme, buying a business can be a rewarding path for those with the right mindset and skills. The episode also highlights the abundance of opportunities in unglamorous and overlooked industries.