PDF Summary:Buy Then Build, by Walker Deibel

Most entrepreneurs dream of building a business from the ground up, but what if there's a faster, less risky path to business ownership? In Buy Then Build, Walker Deibel makes the case for acquisition entrepreneurship—purchasing an existing business rather than starting from scratch. He explains that buying an established company gives you immediate access to customers, revenue, and employees, helping you avoid the high failure rate that startups face.

Deibel walks you through the acquisition process, from finding and evaluating potential businesses to securing financing and negotiating deals. He also covers the transition period after purchase and offers strategies for growing your newly acquired company. With baby boomers retiring and trillions of dollars worth of businesses changing hands, Deibel argues that now is an ideal time to consider buying a business instead of building one.

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Next, we'll cover how to source deals and negotiate effectively, along with managing the post-acquisition transition and growth.

Deal Sourcing & Negotiation

To find opportunities, Deibel suggests cultivating connections with people who can offer beneficial prospects. Bizbuysell isn't the only place to find professional buyers. Rather, you should go out and connect with those in your vicinity who can connect you with deals.

(Shortform note: One way to connect with people who can connect you with deals is to attend succession-planning events. These events are designed to help business owners plan for the future of their companies, including how to transition ownership. By attending these events, you can meet business owners who are considering selling their companies and the advisors who are helping them.)

When negotiating, use an active, solutions-oriented approach. Research shows this cooperative strategy leads to optimal results for everyone. Deibel advises negotiating everything possible, aside from price, before presenting an official proposal. This helps you learn what matters to the vendor apart from price.

(Shortform note: This research comes from the field of organizational behavior, which studies how people interact in groups. Leigh Thompson’s The Mind and Heart of the Negotiator is a good resource for learning more about this research. It explains the research behind integrative negotiation, which is the cooperative approach Deibel recommends.)

Additionally, Deibel emphasizes the importance of grasping the seller’s perspective to establish rapport. This helps you collaborate to achieve the ideal result for everyone involved.

(Shortform note: Understanding the seller’s perspective is crucial because your mind naturally assumes that negotiations are zero-sum, meaning that any gain for the other party is a loss for you. This assumption can prevent you from seeing creative solutions that benefit both sides.)

We’ll explore some financing options for purchasing businesses and discuss how to identify your ideal industry to increase opportunities.

Acquisition Financing Options

Deibel notes that SBA loans are a common option for acquisition financing. These loans are guaranteed by the Small Business Administration, a government agency that provides a portion of the collateral for the bank. SBA loans are easier to acquire than other types of loans since they require a smaller down payment at closing. However, they have higher rates than conventional bank loans. SBA loans require security, so you might need to provide a personal guarantee and possibly offer your home as collateral.

(Shortform note: The SBA doesn’t provide collateral for the bank. Instead, it promises to pay the lender a portion of the loan if you default. The SBA requires you to pledge all available business assets as collateral, and if those aren’t sufficient, you may need to pledge personal assets like your home.)

If the business isn't successful and you're left with a principal balance in the millions, you will be personally responsible for that debt. These loans also don’t support seller financing, since the SBA requires that seller financing match their loans' term, which is much lengthier than typical seller financing. The SBA also prioritizes its claim over business assets above the seller, forcing the seller to subordinate their lien interest to the bank. Generally, the seller isn't allowed to receive any payments for two years. Additionally, SBA loans take a considerable amount of time to process. Deibel recommends seeking banks that employ SBA specialists and have preferred status. These banks are able to internally approve SBA loans and process them with less bureaucratic delay. Establish connections with these banks before you're evaluating a deal.

SBA Preferred Lenders

The SBA’s Preferred Lenders Program (PLP) is a designation given to lenders who have demonstrated a high level of proficiency and experience in processing SBA loans. These lenders have the authority to make final credit decisions on SBA-guaranteed loans, which streamlines the approval process and reduces the time it takes for borrowers to receive funding. To qualify for PLP status, lenders must meet specific criteria set by the SBA, including a proven track record of successful SBA loan processing, a thorough understanding of SBA policies and procedures, and a commitment to maintaining high standards of service. The SBA regularly reviews and evaluates PLP lenders to ensure they continue to meet these standards.

Deal Sourcing & Initial Term Negotiation

Deibel advises defining the sector you're targeting in broad terms to expand opportunities. By broadly determining your target market—like as product-based, online, manufacturing, service, or distribution—you can cast a wider net and find more options. Every company can be classified as supplying a good, serving as a middleman, or offering a service. You should base your goal declaration on these key industry categories.

Classifying Companies by Their Role in the Value Chain

Deibel’s classification of companies as supplying a good, serving as a middleman, or offering a service echoes classic marketing theory, which analyzes firms according to the primary way they create value within a supply chain. For example, Kotler and Keller’s Marketing Management (2016) distinguishes between manufacturers, wholesalers, and retailers based on their roles in producing, distributing, or selling goods and services. This approach helps entrepreneurs identify where their business fits in the value chain and how it interacts with other players in the market.

Post-Acquisition Transition & Growth

After acquiring a business, focus on a smooth transition and growth. Deibel explains that after the sale, employees will quickly align with you as the new owner, and the seller will be ready to move on. You'll only need their help briefly as you adjust. Your most important job as the new owner is to expand the business, applying your skills and commitment to increase income and profit. An enterprise expanding at 10% annually will become twice as large within seven years, boosting your asset's value and cash flow, which can aid in wealth building. After initially meeting the seller, reflect on what you’ve learned about the business.

(Shortform note: Deibel’s advice to expect employees to quickly align with you and the seller to step away soon after the sale is risky. In Joining Forces, the authors explain that successful post-combination integration hinges on retaining and engaging the people who carry the organization’s memory. When key managers, long-tenured employees, or respected former owners exit abruptly or fail to buy into the new leadership, the enterprise can lose essential relationships with customers and suppliers, as well as the tacit knowledge of how work really gets done. This erosion of trust and know-how shows up directly in declining performance and cash flow.)

Consider if it fits your goals, if it excites you, and if you feel proud to lead as CEO. Think about what you liked and disliked, the greatest threat, and the biggest opportunity. Stay focused on your goals. Many potential buyers fail to finalize a transaction because they don't set a timeline, understand the Three As, evaluate their skills, or craft a target statement. They become stuck trying to evaluate all the factors. To avoid this, commit to a timeline, comprehend the Three As, evaluate your skills, and draft a goal statement.

(Shortform note: In Decisive, Chip and Dan Heath argue that great decision makers don’t have a mysterious intuition—they have a better process. They recommend the WRAP process: Widen your options, Reality-test your assumptions, Attain distance before deciding, and Prepare to be wrong. The WRAP process is designed to be simple and repeatable, so you can run through it every time you encounter a potential acquisition. The Heaths recommend writing down your options and decision criteria, which will force you to set a deadline and clear criteria for each potential acquisition.)

When purchasing a company, project forward three years. Think about the company's potential for growth, whether you'll keep the same gross margin percentage, if your expenses might rise, and whether growth will be gradual and consistent. Once you understand the company's fiscal background and trends, develop a full three-year projection. Think about whether revenue will keep increasing and how you can affect revenue, oversight, expenses, personnel, and other improvements.

(Shortform note: In Financial Intelligence for Entrepreneurs, the authors explain that the key to meaningful forward-looking financials is to identify the few operational drivers that really move the numbers—such as unit volume, pricing, customer acquisition metrics, capacity utilization, payroll levels, and investment in equipment or systems. You then translate those drivers into a simplified model of the business. In this kind of model, you lay out your assumptions about sales activity, cost structure, capital spending, and financing, and let them flow systematically through projected income statements, balance sheets, and cash-flow statements for a sequence of future periods.)

Think about how you'll pay for growth and whether you'll have to invest in IT systems or marketing programs. Examine each line item in the fiscal documents and forecast the impact for each. Consider how much additional cash you’ll need for strategies and enhancements to grow, the estimated purchase price, how much debt you’ll take on, and how the debt will affect profitability. Consider whether you'll have to increase operating expenses for growth and marketing. Consider whether you have external equity investors or seller financing. Account for all financial outlays, expenditures, and other factors. Deibel outlines three stages of financial analysis during acquisition: “back of the napkin” projections at the initial review, more specific projections when preparing to write a Letter of Intent, and a firm business plan and financial projections after agreeing to a Letter of Intent.

The Psychology Behind Staged Financial Analysis

Deibel’s approach to financial analysis is rooted in behavioral decision-making theory, which suggests that people often make decisions based on incomplete information and then become overconfident in their choices. By gradually increasing the level of detail in your financial analysis as you move through the acquisition process, you can avoid the planning fallacy, which is the tendency to underestimate the time, costs, and risks of future actions. This staged approach allows you to make more informed decisions at each step, reducing the risk of committing to a deal that may not be financially viable in the long run.

Deibel emphasizes that the seller’s involvement is crucial at the start of the transition period. They can provide training and help you learn the daily workings. However, after the sale concludes, the seller’s role is replaced by yours, and they’ll quickly become less involved in the business. The seller should depart after a brief, set period—ideally within the first month.

(Shortform note: In some cases, it may be inappropriate for the seller to depart within the first month. In The Complete Guide to Mergers and Acquisitions, the authors explain that if the seller’s personal licenses or relationships with key clients are crucial to the business, a longer transition period may be necessary. For example, if the seller holds a unique license required for the business to operate, their immediate departure could disrupt operations and revenue.)

Next, we'll cover the early stabilization phase.

Initial Stabilization (First Three Months)

Deibel explains that the initial 90-day period is crucial for becoming recognized as the company's new leader. During this time, you should become acquainted with staff, clients, and vendors, learn the company's inner workings and systems, understand the flow of money, and start making changes. Deibel recommends spending the initial month familiarizing yourself with the stakeholders, the next month understanding the systems and procedures, and the final month putting your strategy into practice.

(Shortform note: Deibel doesn’t explain how these steps will help you become recognized as the new leader. One way to do this is to achieve some early wins. These are small, visible achievements that you can accomplish in the first 90 days. They should be aligned with the organization's values and goals, and they should be communicated clearly to the staff. Early wins help you build credibility and trust with your team, and they show that you can deliver results.)

Start by holding a meeting with the entire company to introduce yourself to the staff. The seller should speak first to announce the news and introduce you. Remember that employees will be concerned about the changes and how they’ll affect their lives. They'll evaluate your character to gauge if there will be staff reductions or alterations to their compensation or benefits. Address their concerns upfront and assure them that you're not considering significant changes in the first three to four months. Doing so will help them feel more comfortable and reduce their anxiety. You should also meet with each employee individually.

The Risk of Making Promises

If you assure employees that nothing significant will change in the first three to four months, you risk losing their trust if you have to make changes sooner. If you break your promise, employees may never trust you again. This can lead to a lack of engagement, decreased productivity, and even increased turnover. Employees may feel betrayed and question your integrity, making it difficult to implement future changes or gain their support for new initiatives. To avoid this, be transparent about the possibility of changes and communicate openly about the reasons behind any decisions you make.

Deibel emphasizes the importance of concentrating on people, processes, and carrying out your strategy. Identify goals or define objectives that are clear and realistic to help you prioritize.

(Shortform note: In The First 90 Days, Michael D. Watkins recommends that you have a one-on-one conversation with a different employee every week. At the end of each conversation, agree on one thing you’ll both look for in the next week.)