Buying a Business: Did the Deal Change—or Is It Time to Walk Away? (#208) — Transcript
THE PICTURE OF WEALTH · EPISODE 208
The same acquisition can look compelling on Monday and uncomfortable by Friday. Dustin Serviss explores buyer conviction, diligence and deal fatigue—and how to tell whether the facts changed or your reaction did.
Listen to the episode
This transcript was generated from the episode audio and lightly edited for readability. It may contain transcription or speaker-attribution errors. Refer to the recording for exact wording.
Transcript
[00:00:00] Dustin Serviss: There's something strange that happens when you start seriously looking at buying a business. You think you're evaluating the business, but after a while, you realize you're actually evaluating yourself. Because you can look at the exact same deal on a Monday and a Friday and somehow feel completely different about it. Even though the business did not change, you do not really buy a business once. You buy it over and over again. Now you see the opportunity. You get excited, you drive by, you look at it, you imagine things, your imagination lights up. That's what it's like to be an entrepreneur. You get the numbers. You have to look... The numbers look compelling.
[00:00:37] Dustin Serviss: All the things, you know, your knowledge base that you know or the experience that you have, you work from that in your mind. You know, you don't wanna get too excited, but you also don't wanna waste anybody's time. So you're doing your quick math. Numbers look good. Revenue looks good. Margin, oh, I could improve that. Financing. I wonder if I could get financing. Management, where are they going? What does that look? Five to seven years. You know, these are all the things that you start to go over quick before you start going into the deeper the deep, deep of analyzing a business. Now I actually enjoy this part. I like researching things and figuring things out, whether it's business,
[00:01:15] Dustin Serviss: real estate, maybe it's a a private equity deal, venture deal, something that involves giving up some money for a chance of the... Or it's not chance at risk, but a element of risk that has some sort of return. That could even be... You know, I've mentioned other episodes, karting or systems in my business that, you know, I don't really know if it's gonna work, but I'm gonna invest in it and see what happens. I get energy from understanding things. Now there's some certain questions that I want to explore. Am I more excited because the deal is getting better or because I enjoy figuring the deal out? Now that's two things that, again, everyone is different.
[00:01:54] Dustin Serviss: But for you, if you're someone who gets excited by the deal, the actual deal, or someone that gets excited by the research. I know that there's probably a pandemic on right now if you, you know, go to any sporting event or any place where there's males, you know, maybe twenty to sixty years old, maybe even older, and look at what they're scrolling on their phone, chances are it's probably marketplace, which is an indication that as humans or as society is evolving, we're interested in understanding markets. We're interested in understanding a deal or finding a deal. We all like the rush about that. So back to a business. Now we're talking about then in the deal you're looking at, you're
[00:02:35] Dustin Serviss: excited, things are all going good, you know, initial looks good. You ask your banker, hey, this is what I'm kind of proposing or thinking about. What do you need? And the banker loads a pile of information on you and says, these are all the things you need. Well, now you've got a a drain. You've got a shift in sentiment, but the deal or the business or the building hasn't even changed. You know? It's still the same... It's the same asset. But now your mood has changed. Oh, they want more financial information. Oh, you know? And they want more equity, which is more cash out of my pocket. They want another explanation into x y z. Suddenly your mind opens up to maybe other options.
[00:03:17] Dustin Serviss: You know, am I doing the right thing? Is there other options? Maybe I should wait. Maybe something better comes along. Maybe interest rates are gonna change. Maybe I should keep my own cash. Maybe, do I actually need this deal in my life? So sometimes nothing has changed in the actual business. It's your state that's changed. And I think this is one of the hardest parts of buying anything actually meaningful. You're constantly trying to figure out whether your conviction changed because you learned something important, or because you're tired, frustrated, excited, or nervous. Those can feel very similar in the moment. So how do you distill that?
[00:03:55] Dustin Serviss: It's a five million dollar business. You like the owner. You like the industry. The numbers look good. Diligent reveals one customer is twenty eight percent of the revenue. Well, that matters. Then contrast it with three weeks of financing questions, lawyer sends seventeen items that they want, partner asks, do we really want another company? Nothing materially changed with the business, but you've changed, or your your decision making has changed based on mood and sentiment. One changes the investment thesis. The other may just be the experience of doing the deal. Now investment thesis is your actual analysis and what you're, you know, what you've laid out as a great investment of what you think based on
[00:04:37] Dustin Serviss: your past experience or what you've researched online. Many investment firms, if you're doing a, like a fund investing in a business, they have a set criteria. Each person has a specialty, and they bring their analysis to the table. If it's just a simple person buying a business or buying a building, then you have your, you know, main things. And I've started thinking about problems in a deal in a real simple way. Does it kill the deal? Does it change the price? Or can I fix it? Now kill the deal. You know, these would be things like there's an environmental issue seriously on the property, in the soil, can't get financing, and you're gonna gonna have a major headache when you go to sell that business, you know,
[00:05:18] Dustin Serviss: if it's a building or if it's an environmental issue or, you know, that could be a lawsuit on the case of a business that you just don't know. Is there structural problem in a building or in a business? Is there, you know, serious breakdown or a bad trend happening that you can visibly see? Obviously, trends change the future and you you don't know, you don't have crystal ball, but there's sometimes you can pick up on a trend that is very clear. Is management leaving when they are actually essential to you running the business? If you're an investor in a business, you don't want to step in and run twelve hours a day at the business. You wanna bring management in.
[00:05:53] Dustin Serviss: Maybe you bring them in an equity. Maybe you bring them in just on a profit share plan, but you lock that management up. So, again, part of the kill it camp, I would say, is customer concentration is worse than expected. Now that could be... You know, if you've got one building that you're buying and it's got one tenant, that might be worse. But if the lease is long, then it might cancel it out. If you've got a business and you've got one customer that makes up fifty percent of the revenue, that could be a problem. Maybe you can expand it. Maybe you've got expertise in that arena, so maybe that isn't a problem for you. Maybe you've got a customer issue that changes the entire, you know, the entire
[00:06:29] Dustin Serviss: deal. You find out that, after looking at maybe some reviews or under the hood, because usually the reviews that... And the testimonials that companies will post is their best ones, but you find something that is inherently bad. Now price it. So this will be changing the price of the deal. Equipment needs replacing sooner, not a big deal. Working capital needs to... You know, needs are higher than expected. That can be, you know, maybe managed. The lease that they have, on the space or where the business operates is weak. Some risk, that can be quantified, you know, and you can get your head around it and access your network of people to help clean
[00:07:08] Dustin Serviss: that up or price it or try to price it knowing that you might be able to, what I call, fix it, which is the next category, ugly facility, weak website, poor sales. You know? Like, the beauty of buying a business is they have a poor process that you know how to make better. So fix it is actually the... Where the... Bit of the opportunity lives, maybe a bad warehouse layout, underused space on a property, or operational mess. So those are some of my, you know, deals to... You know, does it kill the deal? Should I change the price? Should I, you know, can I fix it? Now on a bad day, buyers can make fixable problem feel fatal. Now I'm gonna say that again.
[00:07:48] Dustin Serviss: Here's the human element of analyzing a business or a property. On a bad day, a buyer can make a fixable problem feel fatal. Now, again, on an excited day, they can convince themselves they can fix anything that should actually kill the deal. So we got two opportune... You know, two opposite things that are a lever in a deal on to buy a business or to buy a property. Now a good buyer needs imagination. That's how actually entrepreneurship, you know, at the grassroots of entrepreneurship is imagination. You have to see something that it could become. You know, maybe a fourteen million dollar business comes a new product line. An eighty million dollar business gets, or has a fragment market.
[00:08:30] Dustin Serviss: Maybe there's a huge platform opportunity that you could bundle things up and make it smoother. Now when you talk one hundred ninety million dollar deals, you're talking about strategic combination of maybe multiple roll ups and creating a super business. Now let's underwrite what exists today. Do not value the business as if all future ideas have already happened. Look at it as it is today and work from there. You can believe in upside without paying today as if it already is created. Then there's another question I find really interesting. Does any of this psychology disappear when the deal gets bigger? I don't think it does. I think it just changes the shape.
[00:09:11] Dustin Serviss: A two million dollar buyer versus a PE buyer. So, you know, in this case, you know, this case study would be like, you know, a two million dollar business. You're talking about a pretty small business. PE is probably not gonna be around, but, you know, a two million dollar buy for a person, you know, they're using their savings. Their house may be tied to it. You know, there's significant impact on the next ten years of their life. The family feels the decision. The main question, what happens if I'm wrong? Now an eighty million dollar PE acquisition, this is different money. There's, you know, investors. The... Where the money came from is, not more diluted, but it is more diluted
[00:09:50] Dustin Serviss: because the investor that is buying this business maybe only put in a hundred grand out of an eighty million dollar deal. So if they put in a hundred grand and they lose it, well, it's bad, but not as bad as losing eighty million dollars. There's still real risk. There's career risk for the person who brought the deal to the table. So a lot of the PE world, its reputation, its career, You are based... You know, judged based on your last deal. And so if you put a bad deal together, that is going to haunt you for a long time. Now the possible question here is, can I afford to be wrong? Well, the bigger question or a a more or something that to be more is, can I defend why we made this decision?
[00:10:32] Dustin Serviss: Because in an eight million dollar PE deal, you're gonna have an investor group that is gonna be up your ass if you've made this mistake. Now larger deals, I'm not really qualified to talk about it. I don't play in that space, but I can, you know, theorize that there's more people involved, more opinions, more internal, selling. So you've got to... You know, as a... Bringing a deal to a larger institution, dance. You know, bigger deals have more zeros. There's more people in the room. And on that topic of people in the room and human dynamics, I want to highlight. So when you are going and buying a business... Again, I've done other episode on seller psychology.
[00:11:14] Dustin Serviss: This is buyer psychology. But what's important is when you're a buyer and going into a deal, to understand the other side makes the deal a little bit smoother. So if you're a buyer going into a deal and you're, you know, frustrated or getting into roadblocks that, you know, are not material, but they are affecting your mood towards the deal, Think that the seller may be thinking, why is the buyer asking this? Why does the bank need that? Why are they taking so long? Why can they not decide? Well, the... You know, you as the buyer are... You're trying to rebuild your conviction and rebuy the business over and over again. You're testing assumptions.
[00:11:56] Dustin Serviss: You're trying to stay objective and not get emotional. You're explaining the deal to maybe your spouse, maybe your business partner. Maybe you are a smaller investment firm, and you've got a client block, so you're explaining the deal to them. Questions are coming up. You're getting bombarded with different perspectives. And as a buyer, you're getting not weakened, but your conviction from when you originally started the deal is starting to get tested, which is actually positive. So that might be why, you know, the sellers are, you know, affecting you or affecting your mood because they're giving you disclosure late. They're taking a long time to get stuff back to you.
[00:12:32] Dustin Serviss: Maybe the sellers are being defensive. Maybe they're changing the story. Maybe the information is coming slow. Maybe they're getting offended by your normal questions. But you as the buyer, you're there saying, what else do I need to know? And that's fair. So one thing that's part of a deal in buying a business and in, you know, not so much real estate, but buying businesses and doing a lot of trans... Transition work with large business owners, medium business owners, even small ones, here's a bit of the seller self sabotage that happens. They say they want to sell, but part of them may not be ready. So once you become fully convinced, like, you're the buyer and you're rolling
[00:13:14] Dustin Serviss: in to, you know, buy a business, and this... The the sale in your head is real if you really want it. Now the seller is thinking, oh, man. The new owner may change things. I'm not sure that I want that. And, again, I did a huge episode last time on seller psychology, which lays out a lot of what's going through the seller's mind. I'm not gonna repeat it here. But a couple things to remember when you're a buyer going into a deal is the seller has had twenty to thirty years of hard work, and they may not feel threatened, but there is a sense of uncertainty in this deal. So being a buyer, going into a business, having patience. Sometimes being the buyer is trying to decide whether
[00:13:55] Dustin Serviss: you are ready to own it while the seller is trying to decide whether they are actually ready to let it go. That's a dance. Something else in buying a business, you want the deal to work. If you're an entrepreneur, you're probably naturally optimistic, probably a good risk analyzer. And as a deal gets going, you're gonna spend time on it. You're gonna imagine owning it. You're gonna imagine yourself there. You're gonna imagine putting your fingerprints on whatever the business or the building is. You're gonna talk about it with people. That's gonna kinda reinstill the story in your head. Mentally, you're gonna make improvements. You know, with the beauty of chat GBT and and all the different AIs,
[00:14:37] Dustin Serviss: you can basically put a picture in there and say, you know, this is what I'm thinking, and it makes it become real. You begin wanting the story to be true. This is just my opinion, but in a good analysis of a business or a commercial property, usually, is always trying to prove yourself wrong. What am I missing? Having smart people also look at what you're analyzing, and your rationale for something gives different perspective. And it's a constant balance of going through a deal that shouldn't be forced. If it's forced, it likely has something in it that should be observed, and if it can be overcome or or follow that intuition. A good deal really comes together quite smoothly, and all the
[00:15:26] Dustin Serviss: things that that you essentially want. And I know there'll be haters. They'll trash on it and say, no. You need to go... Need to negotiate harder, and you can get around things. And... But that hasn't been my experience, and maybe that's just the deals that I've done. Man, it's completely unique, but I I do believe that that in in life, a lot of things that are the best do come together in sort of a smoother fashion. I think good buyers get comfortable sitting in, like, that tension for longer in your analysis. They do not... You know, you don't need to immediately convince yourself that the deal is good. And if you're not running away the second something feels uncomfortable
[00:16:08] Dustin Serviss: and you're sticking around and you're sort of working through that uncomfortableness, there's something probably like what the workout guru say. It's like, you know, you gotta work through the, you know, a bit of that tension, and and that's where, you know, the last two reps is actually where you get the most growth because you're at failure. Well, in an analysis of a business, if you're staying on and doing your investment thesis, you know, this is actually applicable to trading stocks. You know, you have a set criteria that has worked for you and that works with your psychology and your your platform that you're you're working, and you stick to it.
[00:16:43] Dustin Serviss: There's one part about being a buyer of a business, and I would I would put this, less in the the private equity or public equity or big institution that that buys businesses and more in the buyer who is an investment person. You know? It's just like a a person who is maybe wealthy, has a bit of money, and they're buying businesses themselves. So we call that a direct deal. So in a direct deal, things can feel sometimes a little bit lonely, which is kind of like entrepreneurship at times, especially successful entrepreneurship. Banker tells you, you know, what they'll finance. You know, that's really not a really great relationship. Maybe you have a great relationship with the person, but, you know, it's not
[00:17:23] Dustin Serviss: very deep. The lawyer tells you, you know, here are the risks. Maybe the accountant tells you, here's what the numbers say. And, you know, your business partner, if you're, you know, blessed to have one or some people would say not, they challenge your assumptions and you can work through that, is really the only sort of people around and your spouse. If they're part of, you know, those major decisions, then your group is limited. Someone still has to own the decision, and it likely is going to be you. Now the advisers, you know, they don't own the asset afterwards. So as much as they give you good advice or if it's a bad investment, they... You know, not that they don't care, but they are not really going to
[00:18:04] Dustin Serviss: feel it as much as you are. You know, the spreadsheet working or the... You know, this is really prevalent in today's world. The AI... People are asking AI everything. And so the AI is not gonna bail you out when you buy a business and all of a sudden it's become a lot more work than you initially thought. But people are relying on AI a lot for making even basic decisions and then having to struggle through that decision if it's not a great one. Now as I'm kind of talking and you're hearing sort of the buyer experience, you know, for anyone who's thinking about buying a business, I wouldn't steer you away or... My goal is not to... My goal is to promote entrepreneurship, but my goal is also to
[00:18:47] Dustin Serviss: be very real about the things that you experience so you know it's real. Now the fatigue, months looking at same deal. That, you know, deals, you know, when you have the excitement, the initial excitement of seeing something, it might take months. Calls, revisions, emails, lawyers, financing, things, you know, where you're feeling super settled and then unsettled. And you're thinking, man, just make it over. And so it's it's almost like you have an excitement curve that goes up. You have a trough that goes down. You close on the business. If it's a good business, things are rolling and you start to see the fruits, whether the business is growing or it's financial and you start to see
[00:19:29] Dustin Serviss: some cash back, and that sort of back up. And it's the entrepreneurs sort of curve where there'll be ups and downs, but hopefully, for the most part, you're going up into the right. All the fatigue that stacks up and you get through actually becomes clarity later and be... Makes it a more meaningful transaction. So the question I keep coming back to is really simple. When your conviction changes, what actually changed? Did the facts change? Did the price change? Did the risk change? Or did you change? Now the possibilities, you know, for a final end cap reflection, the possibilities when you're looking at buying a business. Are you tired? Are you scared?
[00:20:12] Dustin Serviss: Did you see another opportunity? What... You know, that point is, to me, very good. I don't think that you should go into a deal and be continually looking at what are the other assets I can own. I think you go into a deal thinking, I wanna own this piece of something. You know? Again, whether it's a business and you say, I strategically wanna own this to add this to my own business, or I wanna own this business because I'm passionate about recycling food waste. I don't know. Whatever it is about, you know, your your your reason for wanting to own it, whether it's emotional, lifestyle, maybe you wanna own it with your kids because that's meaningful, maybe it is
[00:20:53] Dustin Serviss: a business that you wanna run not not for profit, but low profit because of the... You know, your desire for that versus a business that you're looking at it from a strict investment. You don't even wanna set foot on the grounds at all during the week, and you want to literally make money. Now that... The... Again, the the... Those different examples I gave are very different ways to look at the business. But if you find, you you found your your item... So, again, let's take, for example, a business or let's do... A building's easy. So one building, and it produces so much cash flow from a lease, and you've got GICs. You could put that same money in a GIC and collect cash flow from
[00:21:36] Dustin Serviss: a GIC, and that would be a different risk profile than only a building. You don't have to go to the building. You don't have to deal with the people, and you just collect the money. Now your rate of return is less, and maybe there's less tax planning you could do, but that gives you an idea of the difference in the return. A GIC produces four percent, and the building without appreciation, just making the cash flow, produces six. Well, that's only two percent different. And I'm not gonna make this an investment podcast, but I do think there is something there when you're reflecting on, should I put my money here? Should I put my money there? You have a bit of awareness of what else is out there.
[00:22:12] Dustin Serviss: And then being comfortable with making the decision to buy the business, understanding why you bought it, and understanding if in the future, the return is a little bit less than that other said asset. It's okay because you know why you're doing it because it's gonna be way higher in the future, if that kinda makes sense. Are you emotionally attached to getting it done? This one I try and, the the beauty of having a partner is you got another person to kind of bounce ideas back. And and if you're emotionally attached to it, that person can see it from a different light. After six months of doing due diligence, are you prepared to walk away? And do you have that time available to you?
[00:22:49] Dustin Serviss: And do you want to take that risk of taking time away from doing something else to analyze a deal and then walk away? Main points to remember. Identify what's actually happening in your head regarding the deal you're looking at. Do not force a bad deal. Do not abandon a good deal just because the process has become uncomfortable. Buying a business should probably be uncomfortable at points. If you're putting five million, twenty million, eighty million dollars into something, there's moments where you stop and ask yourself, what are you actually doing? That's not necessarily a warning sign. The goal is not to become emotionless. The goal is to understand what is happening inside your own decision.
[00:23:29] Dustin Serviss: Build the story. Test it. Try to break it.