Big Deal Small Business: Playing with Live Ammo
November 21, 2023 | Issue #93
This is a newsletter written by Guesswork Investing about acquiring & operating small businesses. If you are a new reader / new searcher, I recommend starting with the New Searcher Reader Guide.
A multimillion dollar loan & personal guarantee is no joke.
You’d think that’s obvious.
However, you can count me among the folks feeling growing frustration at how people online (Twitter, YouTube, forums) make it sound overly easy to buy & operate a small business.
To be clear, I’m all for generating exposure for Entrepreneurship Through Acquisition (ETA) as a viable, exciting career path for many people. I want more people to know about it and have the resources to make a considered decision if it’s the right path for them & their families.
There are plenty of great SMB owners & operators online (Twitter for the most part) talking about how difficult their job is – however, if you’re new to the ETA/search world, they may be harder to find than the larger accounts.
This is no one’s fault – the larger accounts tend to be vendors serving the space, and many of them are A+ service providers (and are on my recommended deal team list). Their online presence is at least partially client acquisition, which I don’t blame them for. But it’s different than “on-the-ground” testimonials from SMB operators.
As a result, if you’re considering search as your next career step, it’s incumbent upon you to dig a layer deeper to learn more about the lived experiences of searchers who closed on an acquisition using a ton of personally-guaranteed SBA debt.
This is not just a fun option – you’re playing for keeps. You’re playing with live ammo.
To aid in that process, I’m sharing three items today:
A list of Twitter accounts that you should follow. I’ll add to this list over time, but this will be limited to folks talking about the candid difficulties of running their businesses.
An ongoing Twitter thread from Hunter Durham, who recently filed for personal bankruptcy with over $2M in personally-guaranteed debt due to his small business. It’s a massive service to the community for him to be sharing about this painful experience so openly. Here is Part 1, Part 2, and Part 3. Note: if you’re dealing with this yourself or struggling as a small business owner, feel free to reach out anytime — happy to hop on the phone and commiserate.
Below is a short anecdote highlighting an SMB nightmare that a friend recently went through – he told me about it this week, and I immediately knew I needed to write a post about it. He graciously allowed me to do so!
SMB Nightmare
Most of us have run into the old-time SMB owner who has zero trust in his employees. He’s convinced their always trying to pull one over them; frankly, an exhausting way to live.
It’s a lot more fun to lead with trust. Yes, you get burned sometimes by folks who take advantage of that, but if you improve your hiring processes over time, good people will use your trust to excel.
But today’s story is one of broken trust. This is 100% real, but I’ve lightly adjusted details / names to protect identities.
My friend Steve owns a home service company in the Northeast – he and his business partner have been operating it for a couple years now, and have largely stepped out of the business. They’re actively looking for deal #2, with the idea of letting deal #1 run on 10-20 hours/week of their time.
In a sense, this is the dream of a searcher – the business is starting to look & feel like the almighty “passive income source” we all want.
Recently, Steve gets a call from a friend Bob, who is a passive investor in a local homebuilder. Bob mentions that one of the new development projects is getting work done, and they received a quote from a contractor in the same trade as Steve’s company.
He passes along the quote to Steve to sense-check the numbers, and to see if he could beat it.
Steve takes a look, runs some mental math…and he just cannot make heads or tails of it. The pricing on this competitor bid is lower than Steve’s material costs for a job of that size, let alone labor time or margin. Steve’s been in the business long enough to know this just doesn’t make sense.
Steve asked for the name of the competitor – Bob takes a look, it’s listed under “Frank Jones”…the same name as one of Steve’s crew leaders…
Now Steve is in investigation mode. Each of his vehicles is equipped with a GPS navigation system, which has a history of each address inputted.
He looked at the last few days of jobs, comparing his scheduled jobs to the addresses in the GPS navigation systems. They mostly matched…except for one, a random home address not listed in the company system at all.
Steve drove by that unexpected address – sure enough, he could see that work related to his trade was recently completed at the home. On the GPS system, the random address was smack dab between two scheduled jobs, meaning the team had likely finished one job early, knocked out this side job, and then finished up their scheduled day.
Said differently, they had completed side work in a company-owned vehicle, while on the clock, likely using company-owned materials. This is straight theft on multiple vectors.
But Steve wanted to be sure; thus began the sting operation.
Back to the original competitor bid that triggered the investigation – Steve told Bob to accept the ultra-low bid from the competitor, and just tell him when the work was scheduled.
On the day of the job, Steve’s wife drove by to take a first look – and yup, it was FOUR of Steve’s employees, in a company-owned vehicle, completing the job.
With that confirmed, Steve drove by next, and took pictures – his foreman was standing out front, answering texts from Steve.
This was a defining moment for a small business owner.
Steve and his business partner immediately texted the crew stating that there is a mandatory company meeting at the office in 45 minutes.
His foreman replied in an annoyed way, given he was supposed to be on leave that day. Steve watched his foreman texting him complaints about being called into the office on his off day…while at a job site doing under-the-table work.
Cutting to the chase, the foreman & three employees were fired that afternoon. Steven only had six to begin with. Steve suddenly lost half his field crew, with a full calendar of jobs in front of him, needing to find new crewmembers to handle them. Not to mention the roughly 5-figure loss he sustained the prior few months from this employee theft.
Doesn’t sound so passive now, does it?
Steve had the good fortune of being well-connected locally (so heard about the issue from Bob). He’d been in the business long enough to have a recruiting pipeline in place, including a roster of 1099 crews to call on. He’d grown the business enough relative to his debt service to be able to sustain the cash flow loss in the prior months and in the ensuing weeks.
How would you handle it if this happened in your first two months in the business though? Right after you put 90% SBA leverage at 10.5% interest rate on your business? Right after you moved your family to a new city?
If you haven’t role played yourself in these scenarios (and worse), you haven’t really thought through ETA fully.
Conclusion
Once you sign on the dotted line, you’re in it. It is very difficult to get out. If you’re a searcher, don’t take that decision lightly as it will impact your life for the next 5-10 years at a minimum.
I don’t want to scare anyone off — I just want you to be eyes wide open going into this.
For thoughts or feedback, just hit reply to this email or post/DM me on Twitter. And to reiterate, if you’re having a hard time as a small business owner, please reach out to me, especially if you feel a little isolated right now. No need to go through it alone.
Thanks,
Guesswork Investing
Brilliant post
Great post.