These “Boring Businesses” Will Make You Rich

Mindy:
Welcome to the BiggerPockets Money podcast where we interview Codie Sanchez and talk about the asset class of boring businesses. Hello, hello, hello. My name is Mindy Jensen and with me as always is my future boring business buying co-host Scott Trench.

Scott:
Thanks, Mindy. I’m going to try to do that while being the world’s greatest EBITDA.

Mindy:
You’re going to have to clarify what EBITDA is. I still don’t know, and I hear you say that all the time. Scott and I are here to make financial independence less scary, even though he uses weird words like EBITDA. We’re here to make financial independence less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter where or when you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business or simply improve your EBITDA. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Okay, Scott, first of all, spell out EBITDA and then tell us what this is, because I don’t know what this is, even though I hear you say it every single month.

Scott:
EBITDA or EBITDA pronounced both ways I’ve heard, is earnings before interest, taxes, depreciation, and amortization. It’s a way of factoring out all the noise in a business’s profit and loss statement to get at an approximation of cash flow. And it’s useful most of the time in valuing businesses. It’s imperfect, like any approximation of profitability is imperfect, but it’s how many businesses are valued, is based on a multiple of EBITDAs, consistent with how we’d value a commercial property. We’d say we’d take the net operating income, NOI, and apply a cap rate to it or multiple to it, and you do the same thing in businesses to value them. And another common term that you’ll hear to describe this when you’re looking at businesses is SDE, which stands for seller’s discretionary earnings.
And it’s another way of describing the profitability of a business. So if a business brings in $600,000 in profit, the owner pays themselves a salary of 200,000 and there’s 400,000 in EBITDA. We would call that business as having an SDE of $600,000. Again, a simplistic example, but the businesses we’re going to talk to Codie Sanchez today who is one of my favorite influencers investors on the internet. I love everything she puts out and think she has a fantastic thesis. She will buy businesses that are valued on a multiples of either EBITDA or SDE.

Mindy:
Scott, I learned so much talking with, I can’t even say talking with, listening to Codie give a really great overview of how she values businesses, how she looks for businesses, how she finds businesses, and how she buys these businesses, how she funds them. This is just a super awesome episode. If you listened to episode 325 with Tim Delaney where he bought a liquor store, and you’re like, that sounds interesting. This one is going to make you want to start looking for businesses.

Scott:
Absolutely. She’s so inspiring. What a treat to listen to her today.

Mindy:
She’s fantastic. We have a new segment on the show called money moments where we share a money hack tip or trick to help you on your financial journey. Today’s money moment is, if you want to spend less money at the grocery store, use self-checkout. Studies have shown that shoppers who use self-checkout save more money because they are more conscious of what they are scanning and spending.

Scott:
One of the reasons why I’m so excited to talk to Codie is because of the thesis in the asset class of small businesses, right? It’s 2023, where do you put your money? Do you put it in real estate? Do you put it in stocks? Do you put it in bonds? Do you put it in cash? Do you put it in private businesses? What are we looking at here? One of the things that’s attractive to me, thinking about asset classes in a general sense, is this market for small privately held businesses that are often owned by baby boomers. So a couple of fun facts. I think it’s like 58% of small businesses are owned by baby boomers, and as many as two thirds of them have no formal succession plan. There are 10,000 baby boomers retiring per day, and that should continue for several years.
There’s nobody to buy these things. These businesses, if they’re not sold, will just crumble or potentially cease to exist over a period of time. And that’s why you can buy these things at one, two, three times cash flow. It’s like buying a $300,000 house that produces $100,000 in annual cash flow. The challenge is, who’s going to operate this? How are you going to actually know how to run the business? How are you going to know which people to place? How are you going to be able to stabilize it? How are you going to be able to grow it? And how are you going to be able to finance it? And this is a complex problem, but for those that are willing to go and dive into this area, self-educate, perhaps even more than you would self-educate to get involved in real estate investing, for example, there can be phenomenal opportunities for returns here.
If you can grow that cash flow and get it to beyond a million or $2 million a year, all of a sudden, not only are you making a million to $2 million a year, but your business becomes worth more because it’s automated and stabilized, and a private equity firm or another buyer can buy it for a bigger multiple than you bought it for. So there’s a very powerful multiplier and expansion effect in this category that should be very, very interesting to our truly entrepreneurial listeners. It’s not for everyone, it’s probably for a tiny minority, but it’s a powerful asset class for those who are willing to invest the time and energy into pursuing it.

Mindy:
Scott, do you have plans when you buy your businesses to hold them forever or to build them up and then sell?

Scott:
I am a student in this space. I hope I would aspire to buying a business like this over the next couple of years, maybe a couple of them, and repeating a small piece of the success that Codie has had with her program. But again, I’m just learning about this for now and maybe in a few years I’ll enter this market, but I’m very excited about this. And if I wasn’t CEO of BiggerPockets today, this would be one of the first places I’d be looking personally to build wealth.

Mindy:
Codie Sanchez is a reformed journalist, turned institutional investor to cannabis investor and advisor to now founder at Contrarian Thinking and co-founder of Unconventional Acquisitions. She thrives on helping people think critically and cash flow unconventionally while allocating to what we call sweaty and boring small businesses. Codie, welcome to the BiggerPockets Money podcast. I am so excited to talk to you today.

Codie:
Well, thanks for having me. I’m thrilled to talk to you too.

Mindy:
Well, let’s dive into your backstory. What does your journey with money look like?

Codie:
Long. I was a child of immigrants who came to the US and felt that money was something that would always be scarce, that money would never really be abundant, that we could never count on it all around us. And in fact, if we ever got it, we should really make sure we hold onto it because the most dangerous thing we could do would be to spend too much and not save enough. And so I had a lot of stories about money that were about, hey, careful that you spent that here. Are you sure that you returned that there? It was all this scarcity and constraint. And the only really benefit to that I think, was that I hate rules and being told what to do.
And because of that story that I was told to not do X and not do Y, led me to focus pretty aggressively on the fact that I never wanted anybody to ever control my finances or to have to worry day-to-day about them ever again. And so I said, what if I just make so much money that I never have to count it and I don’t have to budget and I don’t have to watch my checking account every single day, because in fact, I am going to roll around in money all day. And that eventually became my mindset, and then it became a little bit of an actuality.

Mindy:
So Codie Sanchez is a little bit like Scrooge McDuck.

Codie:
In my mind, I wish it was actually, that would be fun. A little barn full of cash.

Mindy:
Swimming in the gold coins.

Scott:
Well, would you mind giving us a little bit of detail into how your career got started and how you transitioned to what you currently do?

Codie:
I started out in finance. I for a long time did the traditional route of Goldman Sachs, Vanguard, State Street, all these really big companies, and did well in the traditional finance route and then eventually didn’t want to work for the man anymore. I wanted to work for myself. I wanted to be the one who made the rules as opposed to following them. And so that eventually led to me buying my own businesses, doing my own deals as opposed to doing them for a big financial firm.

Scott:
When you think about this asset class and what we’re so excited to talk to you about is this concept of boring businesses. Did you start there with a specific acquisition or did you start from a top level down? No, I think that I want put my money into this type of asset class because of these long term trends, and then from there I’m going to go and move in, or how did you come about this? Was it an intentional approach or serendipitous to get you going throughout that you’ve gone?

Codie:
I started buying businesses because I didn’t want to be worried about working for somebody else and having to collect a paycheck. And so the business was a means to an end. It was, I will buy this cash flowing asset because I want it to replace my salary, and I no longer want to work in a nine to five for 60, 70, 80 hours a week like I was at the time. I didn’t care if that business was a sculpture factory, if it was a landscaping business or if it was a cleaning company, as long as the dollars were there. It was really just an exit path. And then as I got a little bit of freedom and a little bit of room to breathe, what normally happens is you can think. It’s hard to think when you can’t breathe and when you’re suffocated in work. And that changed for me.
And when that changed, I finally realized, oh wait, there’s a thesis here that’s bigger. There’s a thesis that these small businesses all over the country are available for purchasing, that people just like you and I can do it, that you don’t have to have a million dollars in order to buy a business that produces millions of dollars in revenue, that in fact there’s a whole lever that nobody is using and a fulcrum on which to place it that nobody has even considered. And that took many years for me to get to.

Mindy:
First of all, kudos for using the word fulcrum on our show. I don’t think anybody in 400 and so many episodes has ever used that word. I love that. You mentioned you don’t have to have a million dollars to buy these businesses. What kind of businesses are you buying for less than a million dollars, and what do you consider to be a boring business?

Codie:
I consider a boring business to be any business that is a mom and pop store typically, it’s a business that has very little of things like proprietary information, patented technology, really sophisticated businesses or products. These are businesses that don’t have a moat around them. They’re in every single community, and they are things like doctor’s offices, accounting practices, cleaning companies, landscapings, roofing, trucking. These are everyday usually brick and mortar or main street businesses. And the reason that you can buy them for that lower dollar amount is typically because these businesses don’t have a marketplace for purchasers. It’s not like real estate where everybody has normalized purchasing real estate continuously as an investment. People don’t think about businesses that way, at least yet.

Mindy:
You just went against Warren, my best friend Buffet, and said, you’re looking for businesses that have no moat. He’s looking for businesses that have a huge moat like your railroads. But also those businesses are slightly more than a million dollars. No moat. That’s very interesting. So these are going to be less expensive businesses. What purchase prices are you looking at?

Codie:
Totally depends. These businesses go all the way from, I’ve bought a business that was a newsletter for $8,000, to I’ve done multi hundred million dollar transactions and been part of billion dollar transactions, although never led one of those. So they could totally vary in size, just like there’s every size piece of real estate from a house you buy it for $50,000 in the middle of nowhere to a multi-billion dollar, let’s say industrial complex or large tower in New York. They completely vary. And the reason that I don’t care about a moat is because I think that’s a fallacy that a lot of people say in modern day society that you want to start a startup and nobody can come in and steal your market share and grow your market share. Well, most small businesses in your community have zero market share. Nobody’s trying to be, you couldn’t name a nationwide landscaping service.
You couldn’t name a nationwide roofing service. You probably couldn’t even name one in your community or in your city, probably not even the one that you use. And so I think it’s a bit of a fallacy to think that we’d need to have businesses that have these fancy things that protect us from other people, when in fact what protects businesses from competition in this space is baseline execution. Do you follow up with your leads quickly? Do you do the things that you say you’re going to do? Do you actually hire people that are competent, incapable? Do you have any marketing at all? Do you have a website? Those very small things equal, I think businesses that at least can get up to a couple millions of dollars if not actually we’ve seen quite a few tens of millions of dollars in revenue.

Scott:
Here’s the problem that I would love to know how you’ve solved in this space. These businesses, let’s call them 350 to $750,000 in EBITDA or SDE. If you hire a competent CEO who’s experienced and knows what they’re doing, that’s going to eat up such a huge percentage of the profitability of that business if you’re trying to invest in it and not operate it yourself. And it’s going to be very hard to entice somebody who maybe has those qualifications and is making 150 to $200,000 a year who has experience running large teams and can reasonably pull this off, to quit their cushy job and take on a business challenge like this while assuming a pile of debt and putting down a payment. How do you solve this fundamental execution problem?

Codie:
To summarize succinctly, don’t buy a job, buy a business. The answer’s really simple. Make sure you’re not buying too small of a company or that you already have a company that has operators in place at the level that you need to operate them for the amount of money that you have in the business. If you don’t have that, it’s a job, it’s not a business and it’s either not sellable or you should sell it for a very low multiple effect. But most people, if there’s a company that’s making $350,000 to $750,000 SDE, which is just salary for the owner, the average worker in the US makes somewhere between $65,000 and $80,000 to run a business, whether you’re an entrepreneur or a small business owner. So we’re talking about 10X that salary for you to purchase a business and run the business. So if it’s truly a business that has 350 to $750,000 in SDE, that’s actually a pretty good gig for most people.
I think what we have to be really careful doing that a lot of us on the internet I think can fall into, is because we have massive amount of optionality and we maybe have do deals. Some of my deals are no longer of course near that size. But when I first started out, my first laundromat business did like $100,000 in revenue and $67,000 in profit. And I was like in there coordinating with people trying to fix stuff. But I got that business for basically nothing. And that business then was sellable for 3X and it taught me the game of acquisition and then of divestiture or selling a business. I think to your point, buy a business, don’t buy a job. Also make sure your first deal doesn’t bankrupt you. So maybe go a little bit smaller than you assume. And for the average plumber that’s working inside of a business and then buys the plumbing company to run 350K to 750K sounds pretty good to me.

Scott:
Absolutely. I guess I’ve been looking at this kind of stuff, and I’ve been so excited to talk to you because this is something that I want to get into as an investor. I think that I’ve been approaching it from the, well, if I want to actually buy it and not have to operate it, then you have to look at these, this is a really large bet, in order to place management that can actually run something and still have a reasonable return on investment. Well, it seems to me very difficult in practice to go and buy that laundromat, for example. And do so in a way that’s profitable without actually operating a thing myself at first. What would you say to that observation?

Codie:
Well, I think a lot of people, if we remove you from it, so I think people need to earn, learn, then they start to invest and then they master. Most people want to go from earning to mastering, so they want to go, I make some money right now. How about I apply my 250K I have and I go out and build an empire of holding company of small businesses. The truth of it is you just don’t know enough. You don’t know how to hire an operator yet, you don’t know where to find them, you don’t know what the right pricing is for them. So what I would say to most people is get your hands dirty on the first acquisition. Just like I’m sure you did with your first real estate deal. You probably got your hands dirty, you probably did a little bit of the rehab yourself. You probably spent more time than you wanted to on that first deal.
But those reps allow you to scale up really quickly, a lot more quickly than if you had outsourced that first deal completely operationally to somebody else. So typically, unless people are comfortable with risk and have a lot of cash, they say get your hands dirty on your first deal. Yes, the hourly wage that I paid myself when I was in high finance making maybe a million bucks a year, if not high, six figures to run a laundromat, made no fucking sense. That made no sense. But that first laundromat transaction allowed me to scale up to a bunch of other of them, and without it I wouldn’t have been able to be where I am today. And so I think everybody’s got that moment where they have to sleep on the floor for a second in a new business.
And if you love the game, then you almost can’t help but get involved in it. Now, for you, probably a business that only does $67,000 in profit is maybe a little bit too small. And so what you basically want to do is buy a little bit bigger of a business and you want to spend a lot of time with your operator thinking about how you’re going to run it in tandem with them. But I wouldn’t tell you for your first transaction to go buy a business, put an operator in place and then say, hey, it’d be awesome if you could semi quarterly distributions. It’s probably a little bit unreasonable.

Scott:
Absolutely. I think what you’re saying here, what I’m hearing is, you’re making 600,000, a million dollars a year, you’re thinking about getting into the laundromat business here. The answer is you’ve got to work that, it’s basically you’re going to pile this on top of your day job if you’re trying to transition into this world and you’re going to go from 40 hours a week or 50 hours a week at your day job to 80 or 90 for a period of time in order to make this transition. And you’re going to reap that benefit for the rest of your career, because you’re going to go on the owner side of the equation. Is that what I’m hearing?

Codie:
I don’t think there’s more than one path, right? Sure, yes. Option A, you could do that. Option B, you could buy a bigger business, one that does 350 or 750K a year and you leave your job because, I don’t know, maybe you’re not making that in your W2 or if you are making it, that can replace a pretty comfortable lifestyle. So then you just go and put your 40, 60 hours in the business. Option three, you do a smaller deal and you do it with another operator on the side and you spend 10 or 20 hours a week. That’s one thing that’s different I think about real estate than small businesses, is I think in buying small businesses, everybody wants like, there’s like, what’s the one path? What’s the one way to do it? And the reason why there’s so much money to be made in buying small businesses is because there’s not just one path.
The path is how creative can you be in your structuring? You guys know all about that in real estate. How creative can you be in your structuring with your operator? How creative can you be in aligning a business that you might already have an unfair advantage with? For instance, you guys are podcasters. Perhaps you buy a podcast production company which already aligns with the company that you own and you have some unfair knowledge in, and you could immediately bring in new clients, but you actually buy a business that is uncorrelated to whether your podcast goes up or down with sponsorships, right? This is just a reoccurring service business. And so I think there’s so many ways to skin a cat when it comes to buying a business. The real question to ask yourself is all about deal clarity. What does a good deal look like for me?
How much money do I want to make in a business? How much time do I want to spend at it? Where do I want it to be located at? What kind of industry do I want it to be in? And once you have what I call your deal box or your thesis behind, I want to buy X, Y, Z type of business, then your search gets a lot easier. It’s very easy in real estate to say, I buy single family homes inside of the Austin Metroplex area that are less than $500,000, but allow for seller financing at a rate below 3%. That would be one deal blocks, really straightforward. When you come to buying businesses, you have so many more options than single family, multifamily and varying types of commercial, that you can get a little overwhelmed in the beginning trying to figure out what your deal box is. But the most important thing is figuring out what a good business looks like for you. And that is not a one size fits all.

Mindy:
You just said, don’t buy a job, buy a business. And I think that’s fabulous advice. I can hear a lot of people, oh man, I bought this business because I listened to Codie, and then all I do is work at this job. How do you differentiate what’s going to be a job and what’s going to be a business before you actually own it and now have to work three, two jobs full-time to try and make your investment not crash?

Codie:
Well, a lot of this comes down to, so there’s 10 steps to buying a business. Let’s answer it this way. There’s 10 steps to buying a business. First step to buying a business is understanding that the opportunity is out there and that it’s possible to do with not a lot of cash if you want to. And that that business could potentially replace your nine to five, totally doable. Second is deal clarity, which means, hey, I know exactly what type of business would be good for me. I have asked myself, we have 25 questions we ask you, but I’ve asked myself these 25 questions. Third is origination. How do I find a business? Where are they located? Fourth is due diligence. This would be this section. So how do I know if this is a good business that really does what it says it does, where the owner actually only works 20 hours a week and it makes this much amount of money that they say it does so I know what I’m getting myself into?
Fourth is negotiating. How do I negotiate well with the seller in order to get what I want? Six is selling you. So how do I convince the seller that I am the person to take over their little baby that they’ve built their whole lives or that they’ve spent their whole lives building? Seven is going to be financing. So how do I get the money to actually do this deal? Eight is closing. So how do I take this business with my attorney and my accountant and actually close the deal overall. Nine is the first 90 days. And then 10 is growth. And so if you think about buying a business that way, you have, I don’t think you can just listen to a podcast like this, go out and buy a business. I don’t think that’s a good idea for anybody listening today.
I think in fact, you have 30 to 60, 90 days of learning. If you spent 20 to 30 minutes in let’s say something like our course or reading a book or whatever you want to do, you could learn at 30 to 60, 90 days what your deal box is, how to do underwriting, what a good deal looks like for you, et cetera. And by the end of 30 to 90 days, you could move forward on executing a small business transaction. Now, do I think that you would be a pro at it? No. But I think you would have enough understanding to where you’re not going to bankrupt yourself if you follow the steps. It’s not easy, but it’s simple.

Mindy:
Thank you for that honesty, because I don’t want my listeners to be like, oh, I can go do this. No, you need to educate yourself first. And I like these 10 steps. I was furiously typing as you were saying them, so thank you very much.

Scott:
We have a parallel thought process here at BiggerPockets around real estate investing. Where if you’re going to invest in real estate, you should spend dozens or hundreds of hours self educating. Most of our members say that they’ve educated themselves for months or years prior to make making their first transaction. And it seems like it’s even more so the case when you’re buying a business because there’s this general framework of buying a business. And then there’s the industry specific expertise that you’ll need to acquire as rapidly as you can after you do identify a deal in order to be able to competently work in it. Codie, what is your buy box and process and what are you doing currently right now to invest in this asset class?

Codie:
When I buy small businesses, we own 26 right now. When I buy small businesses, today it looks very different than even two years ago before my media company. These days I buy businesses where I have an unfair advantage, that can accelerate my media company or can be accelerated by my media company. And so that might look like I just bought a property management business, for instance, a portion of a property management business because I think that will really help offset my real estate. And so as real estate transactions start to slow down, as Airbnb bookings start to slow down, as we come into a recession overall, as I stop buying real estate as I have over the last two years because I haven’t liked the prices, property management continues to stabilize, because everybody has to have their properties managed. And so I bought a property management company for that reason.
And I talk about it a lot because we have a property management business that we help other people scale up their property management businesses. So it’s like, all right, I make money on the property management business. I make money on the business that searches for best in class property management companies and adds them into ours, and it offsets my real estate portfolio. That’s a good buy for me. The second part of my buy box would be, last week I bought a video production company. And so we do a lot of video, Contrarian Thinking on all my socials. And I was struggling because I knew at media and I was finding it was really hard to have leaders in that space. I was overseeing a lot of editing and way more involved in a business than I ever typically would be because my face was all over it.
And so I was really particular about how we were doing things. And it was taken up way too much of my time, and I was super overwhelmed by it actually. And so I went out and started looking for who are the best in class people in video production. And what I found is the best in class people are largely located at our scale in LA, New York, a lot of the big markets. So I either have to give them a giant salary and convince them to come down here, or I have to go to an ancillary industry. And so what I did instead is I knew brand deals are going down, ads and sponsorships are going down right now as the market starts to downturn. And so I thought, well, why don’t I buy a video production company that typically works with brands? They have a high attention to detail. They’re production values really good. They’re super organized, they have to hit deadlines. All the things we’re struggling with.
I’ll buy one of them, they’ll be worth less right now because the market’s in trouble and I’ll plug them into my company and they’re going to take over all my operations. And so that’s what I did. So right now, my deal box is very strategic. There’s a lot of people on the internet that go out and they’re like buying 372 single family homes right now with their network, or they’re buying every single laundromat or car wash they can find. At a certain point I think you have to ask yourself the question of, is this deal part of my unfair advantage once you’ve done a lot of transactions? And can I scale it to a level that’s meaningful for me? Which is I want to make my businesses make me at least a million dollars a year. And if they can’t do that, they’re probably not in my deal box right now.
Now, 10 years ago that was like 50 bucks is 50 bucks. If it makes me 50 bucks, great deal. But that’s changed today and now the numbers are just bigger.

Mindy:
Okay. I love that. Is there anything that you would not invest in?

Codie:
Oh, tons. There are five businesses I never like to invest in, but there are probably also 50. The five businesses I would never invest in are retail stores. So think boutiques, you just look at the trend lines of what’s happening in retail stores right now, both from a foot traffic perspective and the cost of rent and the competition with e-commerce. I don’t do retail stores. Second is restaurants. Restaurants have one of the highest failure rates of any businesses. Restaurants typically also are very complex to run. So you have to deal with inventory, you have to deal with really migrant workforces, you have to deal with consumer trends, you have to deal with seasonality. It’s just too confusing even for somebody like me.
Third is hotels, that’s just real estate masquerading as a business. Fourth is Amazon FBA. Anything where a single platform can control my ability to reach my end clients, I’m uninterested. I want to control the end experience with the client and be able to communicate with them directly. And the last one would probably be anything related to consulting. Consulting has a lot of key man risk, AKA one person being the point of purchase, why somebody does business with you. And so I don’t like to buy consulting businesses because I feel like that’s buying a job and when the other person leaves I just replace them.

Scott:
Amen. I think that’s awesome. I agree with everything you just said, and I think that’s a fantastic way to approach it, with the exception of I do like underlying real estate in a couple of cases, and I think that if you’re going into retail, and I’ve heard a couple of investors being like, I’ll basically buy this store for inventory and I get the real estate as a bonus on top of it. So there’s sometimes stuff like that you can find in this space. But yeah, it’s not as good as scaling something to a million dollars in profit on a continuous recurring basis, which is your thesis.

Codie:
Well, and you’re right. I own the real estate my car washes are on, for instance. I own some of the real estate that our laundromats are on. But the thing about those two things is they don’t have an expectation of service 24 hours a day. A hotel, they expect 24 hour service. This hospitality game that I think is one of the higher levels of entrepreneurship. And so in tandem with it masquerading as a business and really be in real estate, it’s a heavily service oriented and high expectation business. And so typically when people buy a business, I’m like, let’s start you off. If you’re going to start driving, let’s not learn on a Ferrari. Let’s learn on a Honda. And once you can handle the Honda, then you’re allowed to upgrade to the Ferrari, the Lamborghini.
Maybe you could fly a plane one day, but like day one of driving, you get the tricycle. And so I try to talk at that level for most on the internet. And then in some of our bigger groups, we have guys that have done eight, 10, $50 million transactions. And that’s a totally different ballgame. It’s also when it really gets fun. But that wasn’t that relatable to me 10 years ago, and I don’t think it’s that relatable to most people listening on the internet.

Scott:
All right. I have a complex question here. You started opportunistically with a laundromat. I imagine at this point in time this was not part of a grander strategy to get to where you are now, and you built it bit by bit to this, and at some point it’s shifted into a platform first strategy for your acquisition and your core business. Do you recommend that people start with that platform and strategy first or they just dive in and figure it out and let it evolve later? And the second part of that question, which I think is closely related, is what’s the exit plan here? Is it one giant conglomerate? Is it a private equity type holding company that’s going to invest in large amounts of properties or something else?

Codie:
Let’s start with the second question. The end goal to me in life, most people try to have this five, 10, 20 year plan. And I’ve looked back on my life, none of it basically shook out that way. If you were going to tell me when I was getting my licensing at Goldman and State Street to go into investment banking and asset management, if you said, hey Codie, guess what? In 10 years you’re going to be doing TikToks on the internet, I would’ve thought you out of fucking your mind. I would’ve thought there was no way. And yet we have done more transactions and made more money than just about anybody I ever worked with back in the day. And so thankfully I didn’t stick to my 10-year plan.
My 10 year plan written in my little journal that I write in every single quarter about where I want to go, said that I wanted to head an asset management business for a large firm internationally in multiple locations. Right about now that sounds like fingers against a chalkboard. I couldn’t think of something. I want to do less than go back to suits and Wall Street. And so I don’t have a 10 or 20 year plan. My only 10 or 20 year plan looks something like this, I want to be able to have freedom of optionality to do the things that interest me at that moment with the team that’s super high performing, that allows me to not have to work 80 hours a week if I don’t want to, and yet gives me the option to work 80 hours a week on the things that I want to.

Scott:
The strategy is flexibility, which is really, the word that we use when we talk about planning your personal finances. It’s all about flexibility and having it as soon as possible and sustaining a flexible position, a financially free position for the duration of your life. You’re just take playing on a much larger scale than what we typically see with personal finances here in the BiggerPockets Money podcast. Going back to the beginning, that’s great, the goal is flexibility, but there is a strategy behind what you’re doing, there’s a core strategy. You talked about it earlier with Bolton acquisitions. When did it evolve from opportunistic cash flow investing in this asset class to more of the clear cut strategy that you have today?

Codie:
I started investing with an eye towards this one word of audience in 2020 when I realized after watching Giants like the Rock, George Clooney, Kylie Jenner, Ryan Reynolds make billions of dollars for things that had nothing to do with their core competency, AKA acting or being known on the internet as a personality. I watched them and I thought, what looks like more fun, running a private equity company, which I know a lot of guys that run private equity companies that make hundreds of millions if not billions of dollars a year, or having this giant audience that becomes like a perpetual investor base for you to tap into and you get to launch things to them with basically zero risk to you as long as you understand your audience. And it was that moment that I realized I need to change my entire acquisition strategy. No longer can I just buy just car washes, laundromats, landscaping companies, I now need to buy companies that can be accelerated by my audience.
And if you’re listening to this, you’re always looking for your unfair advantage. So your first deal that you do might be because your dad owns a paint company and because he’s painted homes for 30 years you have an opportunity to buy him out or take over his painting company. So you do that. And you run the painting company for a while and then you realize you could put in an operator and you want to look for your next deal. And the smart thing to do might be that you realize your painting company’s not really a painting company, it’s a marketing firm. You’re actually really good at marketing and sales. And so instead of buying another painting company, you might buy a solar company because you know that the client acquisition cost for solar is some of the highest out there. And so if you have painting clients that you can simultaneously cross sell solar, you’re sitting pretty.
And so how I thought about it was just, where’s my unfair advantage where my dollar can go much further than anybody else? It’s a little bit more strategic than a lot of people online think about things. They want to teach. Here’s X, you pay Y, rinse and repeat every single human. And I think that’s a huge disservice to you, the listener, because I think as the listener you should be asking yourself, I’m a graphic designer who turns out is amazing at doing animations. So because of that, I want to buy a company that can be accelerated by the thing that I’m uniquely good at. And that change was in 2020 for me, and I don’t think I’ve looked back.

Mindy:
How are you funding these deals?

Codie:
Well, let’s talk about how I funded them at first. I’ve done like 80% of my deals up until the last couple of years, seller financing. So pretty much all of my deals were, hey, you have a business, you want to exit, you’re getting divorced, it’s the five D’s. You have death, you have divorce, you have disease, you have something about decisions, but basically where you get into conflict for somebody else in your business or you have distribution, AKA you’re moving, you go to a different location or whatever. So one of these five reasons is usually the reason why these people sell. And because of that you need to sell a business or you want to exit a business. I try to find people at their trigger points. At that trigger point you have a lot of leverage. And so what somebody has divorce happen and they have to sell in their business, I want to be the one to pick it up for pennies on the dollar and be the one that cleanly distributes assets to both parties.
And so most of my deals have been done with OPM, other people’s money, seller financing. 60% of all businesses in small business land gets sold with seller financing. So it’s very normalized, not entirely seller financing, but some portion seller financing. And then I would say I’ve probably done about another 10% of my deals with banks, whether that was an SBA loan, whether that was just a loan from my local bank. And then the last 10% have been deals where I’ve gone out and raised capital for them. So in a traditional way, I’ve raised either equity or debt from friends and family in order to buy a small business. I think most people should try to start with a heavy bias to seller financing and a lower percentage down payment.
We just had a guy in our Unconventional Acquisitions group, which is where we talk about buying businesses. His name’s Renaun, and he just bought a business for $8 million, 100% seller financing, $0 down. The business is located in his geographical area, and the seller of that business is going to stay on for a year to help him transition. It’s an incredible transaction. Renaun was a pretty high paid executive making six figures in a sales capacity previous to that, had nothing to do with this sector type of business, but got really good at negotiating deal sourcing and then trying to find a way for both people to win in structuring a deal.

Scott:
And I think the advantage of seller financing in a lot of these transactions is it keeps the seller with a lot of skin in the game so that they’re there to teach you and be a consultant or give you the answers to questions that certainly you’re not going to get every answer in a due diligence session. I think that that’s a really powerful tool in particular in this space.

Codie:
Agree.

Scott:
Let me ask you a hard question here. What percentage of the time would you estimate when a transaction like this takes place in a company of couple dozen employees, maybe three or four leadership team members, where there’s not a change to the leadership team in the first year following acquisition? Is it more common or less common for there to be substantial changes?

Codie:
Very common, I would say. Typically though, you as the owner are the one that’s going to want to make some of the changes. So if you think about it, the seller has probably been checked out for a bit if they’re selling a business. It takes a while to get to that point of really deciding now I’m going to execute on a sale. And during that poet, oftentimes the team takes their foot slightly off the gas. And so what I would say is I’ve seen less people leave because of management change, that’s a big fear that people have, that seems to be, I would say it’d be interesting to go back and actually see if I could figure out what our real percentage is, but less than 10% of the time do I lose a senior leader that I wanted to keep because I bought the business. Pretty rare for me.
The more common thing is that those leaders inside of the company just aren’t good enough. And so you want to find your operator who can also recruit leaders. That’s a really key component of finding an operator, is they can’t just be an executor. They have to also be a leader. And leaders mean that at prior firms they had other people that followed along with them, that would want to come to the company alongside them. So a really good way to check and see if your operator is going to be good, going to be able to lead, going to be able to retain and recruit talent, is to ask them, hey, man, love to have you run this million-dollar. Business that I just bought. You seem to have parallel skill sets. If I was to bring you over, who else would you want to bring? And how big of a team would you want to have at this company?
And if they were like, I might need this type of person and this type of person, you go, awesome. Who is that? Who do you know? And immediately you’re going to be able to tell how connected they are and are they actually a leader or were they just a manager of people?

Scott:
Awesome. I have a question on this front. As a first time CEO, I found the challenge of identifying poor performers and then removing them quickly and professionally to be very overwhelming for the first little bit. I imagine the culture in investment banking is a little different and there’s no issue with that. And so it’s just a commonplace whenever there’s a poor performer, we move out because there’s a hundred people in line past that and we’re all used to going at a million miles an hour. But I do want to call out that what you’re saying here, and people need to hear this, is when you buy a business, you will fire multiple of the leaders, almost certainly, especially if you’re doing more than once. You’ll need to do it quickly. You’ll need to do it professionally, and you’ll need to have a very clear understanding of what good looks like in each one of those management positions.
And so this is not a role, if you’ve never had to terminate someone or if you’ve never had to terminate someone for poor performance as opposed to they just obviously behave badly or you had a clear thing, this is going to be a new and very, very difficult experience for you at first. Would you agree with that, Codie? And do you have any remarks on that?

Codie:
It’s never fun firing somebody, ever. I don’t think it ever gets better. I’ve actually never met a leader that goes, just fired somebody today. It was awesome. I just don’t think that those people really exist, even in finance, it just doesn’t feel nice. You don’t like to do it to humans, even if you think that they, quote unquote, deserve it. That being said, I’m not sure you deserve the right to be an owner if you can’t have difficult conversations. And so I think a little bit of this is having a conversation with yourself and saying, am I the type of human who wants to lead people? Who wants to be an owner? Who wants to leave a mark on this world? And if so, there are a few things that I have to add to my tool belt through life, and one of them is that I have to release people when they are not a fit for my company and when I am not a fit for them.
And the second that you realize that, one, it’s always better than you think it’s going to be. Very seldom have I ever fired somebody where they’ve, one, been surprised or two, it’s gone badly. And that’s because it’s really important to your point about managing them out. And this stuff is tactical and people who don’t lead teams or run businesses don’t love talking about this actually at all. But it’s really important that you have check-ins early and you get comfortable with friction. I’m always telling my managers like, stop giving compliments to people on your team that are underperforming just because it makes you feel better. You have to have the tough conversation. How terrible would it be if you were learning to ride a bike and every time you fell over, your parents were just like, yeah, just keep doing that. Didn’t work. But you should keep doing exactly that way where you keep leaning all the way over to the left. They’re never going to learn to ride the bike.
And so as a good leader, you have to be able to say, hey, man, your sales numbers are down, you’re not making enough phone calls. Do you want me to listen in to what’s going on there? And to actually give people feedback, and then people won’t be surprised what something happens because you will have been coaching them in and up or out for a period of time already.

Scott:
So again, I think this is going to happen, right? That’s the reason why you’re getting a good deal on the business, is because in many cases it’s poorly run and you have to recycle the management team in many of these cases, or at least some of the management team in some of these deals. I think that’s something for folks to be aware of and think through. The second question I have is first time CEO, which is going to be almost everyone buying one of these types of businesses, they’re going to be first time CEO. How do you know what good looks like from these people? That was, again, the biggest challenge for me coming in as I had never hired a CFO. I’d never hired one of these roles. How do you shortcut that and have better odds, at least in your first business?

Codie:
These are really the secrets. I do three things. I have a 30, 60, 90 day plan for every new hire that I bring onboard. It looks the same across every single business. It’s part of our onboarding documentation. You can Google onboarding plans for Google, Amazon, et cetera. You can Google 30, 60, 90 day plans. You can steal other people’s homework, which is what I would recommend you do. And then just implant the stuff about your company. And inside of that 30, 60, 90 day plan, I have them and or I write out what does success look like inside of that 30, 60, 90 day window? So inside the first 30 days, you will have done X, Y, and Z, 15 or 30 things. Inside of the first 60 days you’ll have done these things. Inside of the first 90 days, you’ll have done these things. The beautiful part about that is at each period, so after 30 days, I say, okay, have you met everybody on the team?
Okay, copy. Yes. Have you created a new roles and responsibilities for your underlying team members? Okay, you haven’t. Why? And so I’m basically going through a checking off every one of those things, and then it’s very easy to see whether they are having success or not. The other thing that’ll keep you sane as a business owner always is a scorecard. And so every single business should have a scorecard or some very simple Excel spreadsheet where it’s like, here is our goal, here is how each person contributes to the goal in some way. If this person does not have numbers that they’re directly aligned with, you’re probably doing it wrong. And I say all this with the idea that, this sort of stuff is stuff that I do 60% of the time every time.
There is always, even after 15 years of me being in business, where I’m like, I don’t have the KPIs and the scorecard exactly right here, so I’m just going to let this person run with it. And then of course something goes sideways. And so give yourself also a little love and grace as a business owner that everybody talks about how perfect they are on the internet and realize that the truth of the matter is that that’s very rare. If you do 60 or 70% of this stuff, you’re going to be a top performing owner. I can’t tell you the amount of owners that never do 30, 60, 90 day plans, that never have underlying scorecards, it doesn’t mean your business is going to be a failure, just means you might have to work harder than you need to. And I don’t really like to work harder than I need to.

Scott:
I’ll chime in there and say that I think there’s an operating system that if you’re a business owner, you should go borrow one. I would recommend EOS, 4 Disciplines of Execution. There is a book on EOS Traction. I would hire the coach to implement it or I’d go with 40, but just borrow an operating system. Invent your own after you’ve used one of these ones that are widely talked about for a few years, because why reinvent the wheel and reinvent every part of running a business? Just put in place a playbook that’s already in place. Do you have anything like that or do you find that operators who do that are more successful?

Codie:
I think having a system is crucial. A lot of my businesses do run on either EOS or Rockefeller, and certainly I’ve read Traction, I like a lot of it. The only thing that I don’t love about it is I don’t love the level 10 meetings, how they run those at EOS. I think that it can be a little too constrained in some of my companies. I also think it doesn’t lead to a great culture fit. It leads to a culture that focuses on very specific tactics and execution every single week, as opposed to, I’ve always abided by the quote of, if you want to teach a man to build a boat, you don’t teach him to find and lay the planks and to screw them in. You teach them to yearn for the open sea. And so I think the real hack in running a business is can you inspire people with the cult-like set of mission and values to want to do the things that you would never have to explain to them and micromanage over them.
And my least favorite businesses are the ones where I am checking off 472 to-do list items because I have to red, yellow, and green every member of the team. And my favorite businesses are the ones where I focus on creating a culture that puts first personal responsibility and personal excellence as a key to personal success and thus business success. And so if you can, wherever you can, focus on the soft things actually. Most people will tell you to focus on the tactics, I’m a big believer in focusing on the story.

Scott:
Codie, do you have any final advice for someone who’s listening, who wants to get into the business of boring businesses?

Codie:
Twofold. One, I think you guys did a really good job of not making it sound too simplistic and easy. You too can buy a business with $0, spend zero time on it, become a millionaire, have a Lambo and a yacht. That’s not what we’re talking about here. And on the flip side of that, also assume that you as a human are much more capable than you’re giving yourself credit for. And assume that you’ve met a lot of business owners. How smart did you think all of them were? Have you been impressed by every business owner that you’ve engaged with? The answer is no. I’ve met a bunch of the big time business owners, and I can tell you what, 10% of the time I’m blown away. And 90% of the time I think, I’m common for you.
And so for those listening, if it does sound like you are the type of human that wants to own a business, that wants to make the impact, that I think is the most powerful impact any human can have, which is to build something, to employ others and to create so other people can consume. I think there’s no higher calling. And I think that buying businesses allows you to do it when you don’t have that startup seed inside of you that you would die if you didn’t build it, but instead just want to get in the game. And I think getting in the game is half the battle, and then you can figure out what game you want to play once you get there.

Mindy:
Codie, this was so eye-opening and so helpful. I really love that you didn’t come in with, oh, anybody can do this. All you have to do is this one thing, and then you can be a millionaire too. It does take work, but it doesn’t have to be this 150 hour a week grind. I love how you presented the unfair advantage idea or suggestion. That’s great. Everybody has an unfair advantage. What is it that you do that you can take advantage of, that you can do better than anybody else? And I had a great time with you, Codie. Thank you so much. Where can people find more about you?

Codie:
Well, if you want to learn more about buying boring businesses, which I think is maybe even more interesting than me, I would go to contrarianthinking.co. That’s our free newsletter. It comes out weekly. There’s a ton of great ideas in there for how to make money unconventionally. We also have a secondary newsletter at unconventionalacquisitions.com, called The Boring Business Brief, and that one is all about acquisitions each week for you super nerds. I would check out either one of those. And then I’m Codie Sanchez and all the interwebs. I think YouTube is a fun way to get a high level view of buying a bunch of businesses. We’re spending a ton of time on YouTube, so maybe I would start there.
Plant inside of yourself that seed of belief. Get a couple ideas rolling around in your head by watching videos that’ll only take 10 minutes of your time and then dive deep into the newsletters and learnings. That’s probably where I’d start.

Mindy:
Thank you, Codie.

Codie:
Thank you.

Scott:
Codie is a wealth of information. You got to go check her out on those resources. And then Instagram you post awesome stuff every day almost. So really appreciate it and learn a lot from you.

Codie:
Well, thank you both. Great questions. I enjoyed the time here.

Mindy:
Thank you, Codie. We’ll talk to you soon.

Codie:
Bye guys.

Mindy:
All right, that was Codie Sanchez, and that was amazing. Scott, I’m so excited that we got to talk to Codie today. Listening to her was just, I want to go buy businesses, I want to start learning more about this, and I want to write down my unfair advantages so that I can start figuring out what I can do better than other people.

Scott:
I am so inspired by her. Again, like I said, I follow her content and think that she does a fantastic job of framing the opportunity and is very real about the puts and takes with this. I do think, again, that she’s so driven and so direct and so blunt and so forceful and passionate about what she talks about, that don’t be fooled. If you don’t have that personality and you’re not willing to go there and be direct. And again, she didn’t say this out loud, but I think that 90% of the time when a company is sold in this setting, there’s going to be changes and terminations or people resigning from the leadership team and perhaps other parts of the businesses in this asset class. And if you don’t have the stomach for that, this is not going to be for you.
So again, a small percentage of folks will thrive in this environment, but those who do will I think find the best returns of any asset class in the United States of America, maybe the world over the next 10 to 20 years here because of the low purchase prices and the incredible opportunity to streamline efficiencies in many of these businesses.

Mindy:
What you’re saying, and I can see based on what Codie was saying, I can see how these are, I’m listening to my furnace guy, Bob, from Circulating Air. If you’re ever in need of a furnace in Longmont, you go to Bob. Everybody knows that you go to Bob. Everybody that I talk to, who is your furnace guy? It’s Bob from Circulating Air. Everybody talks about Bob from Circulating Air. But you start talking to Bob and he doesn’t have a succession plan. I think now one of his children is working with him, but for a while he wasn’t. And what are you going to do with your business when, he’s not getting up there in age, but everybody ages every single day, so what are you going to do when you don’t want to work here anymore?

Scott:
That’s one example of a business that could be cooling off until someone brings a plan to heat it up.

Mindy:
All right, Scott, I think that is going to wrap up this episode of the BiggerPockets Money podcast because Rich is not ever going to do better than that. He is Scott Trench, and I am Mindy Jensen saying, take care teddy bear.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench. Produced by Kailyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.