🔑 Don't get robbed when buying a business
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- Don't pay for someone else's vacation
- Private equity is betting on your local handyman
- Digging up dirt
🔑 Magazines are a dying business. But what if I told you one man is making a killing buying Magazine businesses?
Craig buys transportation & logistics related magazines (like Flying magazine)
He can buy them CHEAP because few others want them. But the audiences are targeted and loyal, and he knows how to sell to them.
He uses his media businesses to acquire customers for more profitable companies: His Logistics data service, an airplane brokerage, and a housing community with a private runway.
Don't pay for someone else's vacation.
This past weekend, I wrote about non-compete agreements on X.
Let me tell you about my huge mistake.
While buying a plumbing business a while ago, I let the seller negotiate their non-compete down from 5 years to 2 years.
No big deal, I thought. 2 years from now, this business will be running smoothly. And the owner is retiring anyway, so he'll probably just travel the world...
I was wrong.
Two years is not much time in business land.
18 months after he stopped working for us, he started recruiting some of our employees.
The day his non-compete expired, he opened a competing business.
Another huge problem: He owned the building we operated in. So he set up shop next door to us.
Having a landlord who operates a competing business is a nightmare.
I'll never put myself in that position again.
My advice: Never let a business seller negotiate down the length of a non-compete agreement.
A business seller insisting on a shorter non-compete period is a huge red flag 🚩🚩🚩
If they do that, you can bet they're planning on competing with you.
And that's the last thing you want when buying a business.
I like this line Mike Botkin shared on X: "Don't pay for a vacation"
Two years is often considered the minimum for a non-compete on a business sale.
But I now believe that's too short.
If the seller is of working age, they may take one year to rest, then one year to gear up for competing with you.
They'll use your money to take a long vacation.
And they'll compete with you after two years.
And if you don't have a non-solicitation agreement, they'll start picking off your employees before they open their new business.
I now prefer 5 year non-compete agreements.
Here's what M&A attorney Eric Pacifici says. Check out my interview with him to hear more of his thoughts on non-competes.
Warren Buffett learned a similar lesson when he bout Nebraska Furniture Mart from Rose Blumkin (read about it here)
Mr. Buffett decided to acquire Nebraska Furniture Mart on a handshake deal. Given the fact that Rose Blumkin was in her 80s, he did not ask her to sign a non-compete agreement.
After the acquisition, Rose Blumkin continued to work in the store, but she grew frustrated by attempts to limit her influence over the operations. This frustration lead her to begrudgingly retire at the age of 95.
The retirement lasted three months.
Missing the thrill of entrepreneurship, Rose Blumkin decided to start a new hustle. She opened up a competing store across the street from Nebraska Furniture Mart in 1989. By 1991 the business was profitable and growing.
If a seller can't agree to a meaningful non-compete, it's time to walk away from the deal.
Don't buy a business from someone who plans to compete with you. They'll likely take a meaningful chunk of your business. They know the market, the customers, the employees, and everything else about your new business.
🔑 Why private equity is betting big on your local handyman
Private equity is buying up home service businesses like crazy. HVAC, roofing, plumbing, and even handyman services are getting rolled up.
But why are these businesses so great for private equity?
This article explains exactly why - but here's the summary:
- fragmented industry
- industry is growing
- recession resistant
- room to professionalize the business
🔑 One interesting deal
Let's take a look at an excavating business for sale in Denver.
What I like
The valuation seems reasonable. The margins of the business seem incredible at first glance (40%). I'd want to investigate that and figure out if the current owner is investing adequately in maintenance, equipment, and other areas. Some business owners will often defer cash expenses the year before they sell to pump out the cash flow figures. But maybe this isn't the case and the margins on this business are just incredible.
I like the age of the business. It's been around for 30 years and has systems for surviving ups and downs.
What I don't like
The main thing I don't like about this business is that its tied directly to new construction. Housing demand in Denver soared the last few years, but that demand could dry up. If it does, this business would likely see a reduction in revenue.
I also question why the FF&E and real estate figures are exactly the same.
They may be using "EBITDA" in the place of cash flow here, which is a big no-no, to be determined...
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. Take a look and please subscribe on YouTube if you haven't already.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
