October 23, 2020

JF2243: Growing Your Business With Carl Allen

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Carl is the founder of Dealmaker Wealth Society and is a corporate dealmaker who has worked in 330+ transactions worth $48 billion. Carl is an expert in buying, selling and even growing a business. In today’s episode, he will be sharing how he goes about each of these.

Carl Allen Real Estate Background:

  • Founder of Dealmaker Wealth Society
  • He is an entrepreneur, corporate dealmaker who has worked on 330+ transactions worth $48 billion
  • Has advised Bank Of America & Hewlett Packard on investments & acquisitions
  • His expertise is in buying, growing, and selling businesses
  • Say hi to him at: www.dealmakerwealthsociety.com 
  • Best Ever Book: That Will Never Work

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Best Ever Tweet:

“There are only three ways to grow a business; organically, partnerships, or my favorite, by acquisitions” – Carl Allen


Theo Hicks: Hello best listeners, and welcome to the Best Real Estate Investing Advice Ever show. I’m Theo Hicks and today, we are speaking with Carl Allen.

Carl, how are you doing today?

Carl Allen: I’m great. Thanks for having me on the show.

Theo Hicks: Thanks for joining us. Looking forward to our conversation and talking about how to grow a business. But before we get into that, a little bit about Carl. He’s the founder of Dealmaker Wealth Society. He’s an entrepreneur and a corporate dealmaker, who has worked on over 330 transactions worth $48 billion. That’s a billion with a B. He has advised companies such as Bank of America and Hewlett Packard on investments and acquisitions, and his expertise is in buying, growing and selling businesses. His website is http://www.dealmakerwealthsociety.com/.

So Carl, do you mind telling us a little bit more about your background and then what you’re focused on today?

Carl Allen: Sure. So I’ve been in the deal-making space now for 28 years and two weeks. So I left University in 1992. I went to work on Wall Street for an investment bank. So I was buying and selling businesses for other people; so IBM, GE, Boeing, Microsoft, etc. And then I left, I went to business school, got an MBA and then I ended up working in corporate mergers and acquisitions. So I was one of the acquisition directors at Hewlett Packard, so I was buying businesses for them all over the world.

And then my life completely changed in 2008. I was in a boardroom in Moscow closing a deal, and my wife went into labor four weeks early back in the UK, so I had to get myself back to England. l saw my son born, and then I quit. I retired at 37. I lasted about three weeks. I decided to become a business broker, and the first deal I got to sell instead of brokering the sale, I ended up acquiring it myself. I borrowed some money to be able to buy that business.

And then for the past 12 years, I’ve been buying and selling small businesses in the United States, UK and Australia. I own a private equity firm in the US, where we’re buying and selling and growing businesses. And then my other job is I’m coaching and mentoring 5,500 entrepreneurs and small business owners on how to Buy businesses using other people’s money. So that’s what I do.

Theo Hicks: Thanks for sharing. So this is a real estate podcast, and as most people listening know, real estate is considered a business. And rather than buying and selling full businesses, we’re buying and selling real estate.

You mentioned in your bio that you are an expert in buying and selling, but also in growing businesses. So I think one thing that we can talk about would be some tips you have on growing a business. And you can talk about this in the context of your company, going from buying and selling a few businesses to scaling to buying and selling multiple per year. What are some of the things that you needed to do in order to scale? And then we can figure out how to apply that to real estate investing.

Carl Allen: There’s only three ways you can grow a business. You can grow a business organically, so you go get more customers, you just do more of what you currently do. That’s what most people do. You can grow by partnerships, so you can have affiliates and other partners to grow together, or my method of growth is to grow by acquisition. And that’s what the big guys do. And there’s no reason why a small company, no matter how big or small you are, you can grow your business exponentially and very quickly by acquiring another business.

So let’s say you own a business, it’s doing a million dollars of top-line revenue, and it’s taken you three years to get to that stage from starting that business. You can double that to 2 million in 30 to 60 days by going out and acquiring another business. And there are three types of businesses you can acquire. You can acquire a competitor, so you can acquire somebody down the street that’s doing exactly what you’re doing and then you’re just doubling down on your market share. You can acquire a business, say in your supply chain. So let’s say for example, you own a lettings agency in real estate, you could go and buy a cleaning company, because obviously every time you sell a property or you rent it out, you need cleaning.

Or you can go and buy something that’s complimentary.  For example, if you owned a software company and you’re selling software, you can go and buy an IT services company, and then you can sell your software to the services customers and vice versa. And then as you bring those two businesses together, there’s a whole bunch of duplicate costs that you can take out. So it’s like a one plus one equals three on the revenue side, and one plus one equals five on the cash flow side. As I said, all the big public companies, they grow by acquisition and there’s absolutely no reason why any business, irrespective of size, can’t do the same thing.

Theo Hicks: You mentioned supply chain, and that’s something we can focus on for sure, because typically how real estate investors will work – it’ll start off, they’ll be the ones that buy the properties and whatnot, but the other people in the supply chain, say the property management company, as you mentioned, the cleaning people, maintenance, they still kind of contract all that out to someone else. Whereas once people get big, they start bringing all those things in-house.

So from that perspective, how do you know when’s the right time to buy someone in your supply chain as opposed to contracting out and just paying them and using a third party? Is there a formula? Is it a certain amount of time? Is it based off of how much money you have? Is there anything you can say about that?

Carl Allen: Well, it depends on the industry. Each industry is different. I think anytime that you want to grow, there’s no reason stopping you acquiring something from within your supply chain, because instantly, you’re saving on that margin. And then also, depending on what type of business you buy, it’s opening you up to growth in other areas.

In terms of the financial piece, that’s a really big myth. People think that if you want to buy a business worth a million dollars, you have to personally go out and cut a $1 million check. You don’t. You can use other people’s money to buy a business. You can use the sellers money i.e. you pay the seller over time for the business; that’s called seller financing. If the business is profitable, it’s got cash flow, it’s got assets on the balance sheet, then there’s trillions of dollars of financing that you can tap into to be able to make a closing payment, which is what you pay the seller on the day that you take ownership of the business.

So this is what the Wall Street guys do. This is where I grew up back in the 90s, doing deals using other people’s money. I’ve done just perfected a methodology and a model to apply that into the Small Business space, which we both know is where the vast majority of businesses are, at least in the United States.

Theo Hicks:  When you use other people’s money to buy a business, is the financial structure you create with them based off of that particular business and revenue that business generating, or is it based off of the entire company? So let’s say I’m a real estate investor and I want to buy, as you mentioned, cleaning company, I go out there and I raise money to buy that cleaning company. Will I then pay my returns based off of just that cleaning company or do I pay them returns from my entire business combined? Does that make sense?

Carl Allen: Yeah, so you can do both. The smart way to do it is to just leverage the resources of the target company and buy it just using itself. But if you were to bolt that company into what you’ve already got – let’s say you were doing an acquisition, where there wasn’t enough resources in the target company to acquire it and you needed to leverage what you’re already doing, then definitely, you can do that.

There’s three ways to finance any deal; you can use seller financing, which is putting all or as much as you can of the purchase price into future payments and then you’re using the cash flows of the business that you’ve acquired to make those payments. The second is you can raise debt financing through like the SBA or you can go to a traditional asset-based lender who will lend you money against the real estate or the plant and equipment, or even the receivables or inventory inside of the business. And then the third area you can go for financing is to investors, so angel investors, or you can even do crowdfunding. So this is where you’re selling membership units; you’re selling equity in either the target business you’re buying or your combined group to be able to make those acquisitions and scale. And a lot of people kind of balk at that. They think, “Why would I dilute my ownership just by having an investor come in and help me fund the deal?” And it’s kind of a short-sighted principle, really, because number one, if you own a million-dollar business making 100 grand of cash flow and you buy another million-dollar business making 100 grand a cash flow, by the time you’ve integrated it, you might have a business doing $2 million in top-line revenues and half a million in free cash flow because of all the synergies that you can get. So you 5x your value pretty much in 30 to 60 days; if you have to dilute 10% or 20% of your ownership to 5 x your wealth creation, then, for me, it’s very, very simple math.

The other issue that a lot of deal makers don’t really grasp is that by bringing investors into your business, you’re having somebody come in that can add a lot of value to your business development, can add a lot of value to the business. You might have a skills gap inside of your organization. For example, you might not have a CFO, you might rely on your CPA  to guide you financially, when all businesses really need an internal CFO, whether it’s full time or part-time, to really guide you through some of those issues. So bringing in an investor that’s got financial chops, not only gives you capital to scale and do deals, but also can plug a really key gap in your business.

Theo Hicks: I’m sure the answer to this question depends, so maybe you can give me an answer with a specific example… But how do you find these companies to buy? What does that process look like? Is there a website I go to? Is there something where is more proactive on my part, where I need to say, “Okay, well, this is what company I want to buy,” and then I kind of research potential companies that might fit that criteria, and then once I find that company, what do I do to figure out the numbers, so I can figure out what to offer them? Things like that.

Carl Allen: So there’s two questions there. I’ll answer the first one. So the first part of your question really is all about what we call deal origination. So it’s deal flow. And that’s similar for real estate. The lifeblood of buying businesses or being a real estate investor is you need high-quality deal flow. And in our business, there are really four primary methods of generating deal flow.

So the first one, where most people start, is they go to business brokers. So there’s thousands and thousands of business brokers. Bear in mind, there’s over 2.4 million small businesses for sale right now today, in the United States. And a lot of that’s driven by baby boomers. There’s 10,000 retiring every single day, according to The Wall Street Journal, and a bunch of them own a small business. So there’s thousands and thousands of businesses every day coming to market. Some of those get listed online, so BizBuySell or Transworld or the thousands of other business brokers out there. They specialize sometimes in location in industry, etc. So even if you google “business brokers”, you’ll get pages and pages of them. So that’s where a lot of businesses are for sale.

But then also only about 20% of businesses that actually sell through a broker. A lot of businesses sell through networks. So it’s in your interest to be a smart dealmaker to originate deals off-market. Off-market deals exist in real estate as well. So you’re buying a business that nobody else knows is for sale. And to do that, you’ve got to build and leverage your network. And what’s really interesting is if you own a business, before you decide to list that business for sale, there are people in your network that you will tell. You will tell your wealth manager, you will tell your CPA, you will tell your lawyer, you will tell your banker or your existing financier. You also tell your spouse, but obviously, we can’t network with those people.

So as a dealmaker, if you’re building networks with those four primary deal intermediaries – wealth managers, CPAs, lawyers, bankers and financiers. If you’re building those networks and you’re pinging those networks for deal flow, you’re going to get some incredible deals into your funnel, before they go anywhere near a business broker.

The other method that we utilize is social media. So back in 1992, when I started my deal-making career, we didn’t have Facebook, LinkedIn, Google and all these phenomenal online platforms that we have today. But now those are amazing tools to leverage. I can’t tell you the number of businesses I’ve bought off LinkedIn. It’s incredible. And you can use these platforms to network, you can use these platforms to join groups and you can use these platforms to solicit deal flow either directly from the people that are on there or through their network that’s connected.

And then the other method that we utilize is the direct approach. So this is old school. There’s no reason for you to get a free trial of Info USA, pull a list of 50 to 100 businesses that you like. You can literally go into that platform—and let’s say you’re a web designer and you want to buy a web design company, you can go into a tool like Info USA and say, “Hey, show me all the web design companies doing between one and 10 million in revenues within the city of Chicago or within 50 miles of city of Chicago,” and it prints out the whole list. And then you can approach them. You can approach those businesses to inquire whether they’d consider a phone call or a meeting with you to entertain you potentially buying the business.

So those are all the methods of deal origination. Your second question is a great question was how do you know how to value a business? It’s a question of psychology and numbers. So most businesses tend to sell for a multiple of their free cash flow. So the average in the United States for a small business is about 2.6 times. So if you’re making $100,000 a year free cash flow, then your business is going to be worth around $250,000 to $300,000 to a buyer.

Now, obviously, the value of the business is one thing, the way you structure the deal is another. I would pay $500,000 for that very same business if I could pay for it over 10 years, and use the business’s cash flow to be able to do that deal. And inside of all of my training and mentoring programs, we have all the templates and models. You just plug in the basic numbers of the business and it does the valuation and all the deal structuring for you. But there’s videos on YouTube and there’s tons of free resources out there that can do the same.

So the financial piece is the absolute easiest part of the process. Even raising the capital is the easiest part of the process. The bit that takes the time is determining what type of business you want to buy and then going out and leveraging those deal flow methods to generate a strong list of high-quality opportunities that you can consider.

Theo Hicks:  Alright, Carl, what is your best ever advice for buying, growing and selling small businesses?

Carl Allen: Grow by acquisition. It’s quicker, it’s less expensive and it’s far less risky. It’s getting so difficult today to grow a business organically. There’s so much competition. It’s so much more expensive now to buy media, whether it’s online or offline. Go and acquire a business that’s doing what you want to do and connect it to what you’ve already got and use other people’s money to do it. You can literally double your business in a day by acquiring into the company.

Theo Hicks: Alright, Carl, are ready for the best ever lightning round?

Carl Allen: Sure.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:19:22] to [00:20:15]

Theo Hicks: Okay, Carl, what is the best ever book you’ve recently read?

Carl Allen: Wow, that’s a great one. I literally finished reading it last night. The book’s called That Will Never Work. And it’s the story of Netflix, the guys that founded Netflix in the 1990s; absolutely fantastic book about entrepreneurship, about building a business and about really having the steel to kind of follow through on your dreams. Awesome book, highly recommend it.

Theo Hicks: If your business were to collapse today, what would you do next?

Carl Allen: I’ll go and buy another. I own tons of businesses. So if they all collapsed—well, that would be mathematically impossible. The world would have to end. But yeah, I’ll just go and buy another business. I’m 50 this year. I’ll be buying and selling businesses when I’m as old as Warren Buffett. So I’ll just keep doing it.

Theo Hicks: Tell me about a deal that you lost the most money on? How much did you lose and what lessons did you learn?

Carl Allen: So that’s a really excellent question. So I actually never invest my own money when I buy a business. So I’ve never personally lost my own capital. I walked away from a million dollars when I left HP. But one interesting deal that I did, I bought this business, it was doing $18 million in revenues, huge business and we grew it. And then we were offered a very large check to sell. So I would have cleared at least $5 million minimum. And we turned it down, my business partner and I, we decided to keep going. And then about three weeks later, our largest customer pulled the plug on us and we had to sell the business for $1, because we lost all of our profitability overnight. So I would guess that’s the most—it was paper money that I lost, not actual money, though.

Theo Hicks: And then on the flip side, it tells about your best deal you’ve ever done.

Carl Allen: So the best deal I’ve ever done was I bought a company in Australia about nine years ago, that manufactured a shark deterrent technology. So the coolest business you could ever imagine. So that company had designed a patented product that you could strap to a surfboard or on a sailboat or include it in a scuba diving vest, and whenever you went in the water and a great white shark came near you, it couldn’t get within 50 feet of you because this device sent out as sonar pulse array into the water. So absolutely phenomenal business. I owned that business for about four years. And then I sold my equity to my two partners that were both working full time in the business. I wasn’t so [unintelligible [00:22:46] I’ve ever done it. It was just an unbelievably awesome company.

Theo Hicks: What is the best ever way you like to give back?

Carl Allen: So what’s really interesting is for me, it’s sharing my experience and my methodology of doing deals. Because I’ve been at this for such a long time now, almost 30 years. I do my own cooking and I’m doing my own deals inside of my private equity fund. I love coaching and mentoring people and I love seeing how they change their lives. And there’s no kind of prescription for who’s the best type of person to buy a business. I’ve coached multimillionaires to do deals. I’ve coached people that literally had to sell their furniture to invest in one of my training programs. But it’s such a pleasure for me to coach people on what I do and see them get the benefits of business ownership and cash flow. It’s amazing.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Carl Allen: So what’s really interesting is I’ve actually put together some free training. So for people that maybe they want to hedge out of real estate investing or they’re just curious about buying businesses and generating cash flow and wealth down that route. I’ve put together some free training. So if people go to http://trainwithcarl.com/best-advice, there’s a bunch of free training and resources on there for people to really kind of dip their toe in the water and determine whether this is a wealth creation strategy that they’re interested in.

Theo Hicks: Yeah, I definitely think that buying, as you mentioned, the other companies in your supply chain… I think the best example of how this would apply in real estate would be rather than starting your own property management company from scratch, just buying one instead. I think that’s the biggest takeaway that I actually hadn’t thought of before from this conversation across.

Carl Allen: That’s awesome.

Theo Hicks: Carl, I really enjoyed this conversation, very refreshing. I haven’t talked to anyone on the podcast about this before. And I also really like the way you think, because whenever I ask you a question, you’re like, “Well, there’s three things,” or, “Here’s two things.” So you made it very easy to follow along. So just to kind of quickly summarize what we’ve talked about…

You mentioned there’s three ways to grow a business. There is doing it organically, just kind of continue to do what you’re doing. You can do it in partnership, right? So two companies partner up, and then go together. And then there’s through acquisition, which you said is the best way to grow, especially now with how expensive and how competitive it is to grow a business from scratch. And then you mentioned, there’s three types of companies you can acquire. One would be you buying a competitor, two, buying something in your supply chain, and three, buying a complimentary business.

You mentioned that it’s kind of a myth that you need to use your own money to buy someone in your supply chain or a competitor. So you don’t need to wait until you have that amount of money to buy them. You can do it through, you mentioned three ways – seller financing, debt financing and then using other people’s money. And then we also went through the four different ways to get deal flows. So you can work through business brokers, networking and specifically you said, work with wealth managers, CPAs, lawyers in the financing side, because when someone’s ready to sell their business, those are the first people they’re going to tell. So if you are tapped into those networks and those people know what types of businesses you’re looking for, then they might come to you with this opportunity before it gets listed with a business broker.

The third way was social media. You said like LinkedIn is really good. You join groups, you can network with people and then you can also actively solicit for deals. And then the direct approach, which was the old school way, which is go to a small business listing site, print out a list and approach those businesses directly to try and get in front of them. And then you mentioned how do you value a business and that the average would be 2.6 times the free cash flow, but you’d be willing to pay more for a business based off of financing. So the people listening, they understand you can pay a bit more for a piece of real estate based off of the way that is financed, because at the end of the day, it’s really about the cash flow.

And then, as I’ve already mentioned, your best ever advice was to grow by acquisitions as opposed to growing organically, and then at the end, you gave us a link to your free training.  And also, thank you for sharing all this great advice. Best ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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