Ep585: Ted Leverette – Buy Businesses That Have Fixable Problems

Andrew Stotz 00:02
Hello, fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community, we know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And that mission has led me to create the become a better investor community. In the community, you get access to our global asset allocation strategies and stock portfolios, our investment research, weekly live sessions, and most importantly, the risk reduction lessons I've learned for more than 500 guests go to my worst investment ever.com right now to claim your exclusive podcast listeners lifetime discount fellow risk takers. This is your worst podcast host Andrew Stotz, from A. Stotz Academy, and I'm here with featured guest, Ted Leverett, Ted, are you ready to join the mission?

Ted Leverette 00:56
I'm ready to go.

Andrew Stotz 00:58
I am excited to learn from you. And I'm particularly interested in what you do and your level of experience in it. So let me introduce you to the audience. For more than 30 years, Ted Leverett, the original business buyer Advocate has been helping people worldwide find and buy the right businesses the right ways, by training and assisting them through any or all of these phases, preparation, targeting, search, due diligence, financing, valuing, negotiating, and transitioning into their acquisition or merger. Ted positions clients to be the first choice of brokers and sellers. And to complete more profitable deals sooner with less aggravation at lower costs, how actionable guidance readers How To books available on Amazon, and then let him help you deploy his proven best practices. My goodness, Ted, take a minute and tell us about the unique value that you bring to this world. And then I want to learn more about your business.

Ted Leverette 02:06
Well, probably helping people find and buy the right businesses the right way. It's no more complicated than that.

Andrew Stotz 02:14
I think that's what I like about, you know, the way you describe what you do is it's a lot of stuff, but it's pretty simple and straightforward. How did you ever get started in something like that? I mean, when you're young, were you thinking, I want to be an expert on buying businesses and selling businesses and all that, or how did it start?

Ted Leverette 02:34
It started when I moved from a successful career and bought a business that was my worst investment ever, that we'll talk about no. And what came out of it is discovering there was a whole world of people like me who didn't know what they were doing. And that created this business buyer advocacy niche that I've been doing for a few decades.

Andrew Stotz 02:57
And maybe we just talked about that for a little bit like what's the ideal, let's say we've got a listener here. And someone's thinking about buying a business, someone's thinking about selling their business, what type of people should, you know, could benefit from what you've got?

Ted Leverette 03:14
Well, people who have not already purchased a couple of businesses successfully, the kinds of clients who hire me or buying businesses that have maybe 20 to 50 employees, they're about to pay several million dollars for them, their privately held businesses. My clients are not investment people. They're not. They're not private equity groups or m&a people, there are people like maybe you and I, who are sick and tired of what they've been doing and want to control their life and work like particularly, and they decide buying a business is a pretty good idea. What they soon discover, though, is how risky it is. And that's how they discover me, and maybe sometimes I can help them.

Andrew Stotz 03:57
I mean, I wonder, I did a study a while ago, when I was at an investment bank, I looked at 5000 m&a deals, and the first thing I was looking at was the price reaction in the market. And generally what you could say is that you know, you would benefit if you bought the company that's being acquired before the announcement, ultimately, which is very hard to do, because most people don't have inside information. And the people who do are not supposed to train on it. But it's only a slight advantage that you get from that. But what was really fascinating was, I calculated the average return on invested capital of the company that was buying the other company. And what I found was that about almost 80% of the time, the return on invested capital three to five years later was lower. Now that did not make intuitive sense, because of course, everybody's like, I'm gonna buy this company and we're getting a good price. There's synergy, but it shows that things kind of fall apart or they're not as you hoped. When you Look at your experience with people going in with the excitement of buying a business. What goes wrong? I mean, just before we get into your story, but like what would be genuinely something that you could help the audience understand? Well,

Ted Leverette 05:13
number one, they settle for what they can find. And then they do that deal. And number two, they either buy the wrong business or they buy the right business the wrong way. And it's because they do it yourself and just don't know any better.

Andrew Stotz 05:26
Yeah, I guess that's when you talk about the private equity and all these guys that are buying businesses and selling businesses, the worst situation would be, you know, you having no experience sitting across the table from these guys that know not only all about the business, because they've been either operating it or owning it, and who know all about finance and how to protect themselves. And then imagine that you knew nothing. Versus Imagine that you are their advisor sitting next to them, telling them you know, here's what to watch out for. So I see a lot of value and let's just for the people that are listening, that have businesses, or are looking at acquiring businesses, they're in the middle of it right now. What's the best way for them to follow you get in touch with you learn from you?

Ted Leverette 06:14
Well, probably the easiest way is to just google me or go to YouTube, or LinkedIn. And my name is Ted Leverett, and you'll find hundreds of risk of results, just click any of them.

Andrew Stotz 06:27
So we'll have links to all that in the show notes. So if anybody wants to reach out Ted's there and ready to help, so now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to then tell us your story.

Ted Leverette 06:46
Bear with me, I made an outline. It's been a long time since this nightmare happened. But I remember what I said. I said, Honey, I don't know how to say this. But I think I'm I'm gonna lose the investment in the company I bought. And we're in for a substantial loss if I have to pay the business's debt. And I met at those words to my well my soon to be wife. And basically, I bought the wrong company. And I did it the wrong way. It was a privately held business and eight figure deal. So it was quite a bit of money. And what really, I guess is irked me, my whole career is it just should not have happened. I went from a very successful career consulting with people fixing their problems. And now I had to spend time trying to fix the problem that I created. So I went from a high-income stream to pretty much no income stream. And it took a long time about a year or two to extricate myself and live without humiliation for a real long time.

Andrew Stotz 07:54
And I'm curious like what was it that you know, hooked you to the business that you missed?

Ted Leverette 08:03
Business Buyer fever? Hmm. Business Buyer fever is the term I came up with. Because it's one way to suspend our common sense, which is temporarily gets so enamored, or we're taken over but we see the opportunity that we just do stupid things. And that's what I did.

Andrew Stotz 08:29
I often say that all the people that come to me talking about buying a business, building a business starting up a business, and I always tell them the problem is that this whole arena is a trap. Because once you get in you can't get out, you know, if I buy a stock and I don't like what the management is doing, I just sell it. Did you feel trapped once you got into it and how did that affect your kind of decision-making in the way you felt?

Ted Leverette 08:56
Well, what that buyer favorite did for me and for other people who make mistakes is we just don't dig deep enough. We don't ask the right questions. We don't we're do it yourselfers. I was just mesmerized by the sellers forecast the good things to come it looked like it was a very successful business. So most of them I looked at were the financials and they looked okay, but but the devil was in the details, the non financials, the things that had to do with relationships with the employees and the customers and the suppliers and landlord. I didn't look into any of those things. I just believe the story, I believe the financial statement and even worse when it came to do the financing. I use like the most naive mix of acquisition financing. And then after I got control of the company, I didn't finance it right, either. This case you're wondering this was a holding company. It had three operations that had a consulting operation. It had 11 travel agencies and also had a travel agent training school. And so the operator of this company, the holding company, he really knew the travel sector. But he didn't have a clue about managing the holding company, which of course, what I was buying, and they didn't know anything about finance. So he just delegated the money matters to what I now know or news shortly was in the net, an accountant. So when I asked this guy, why he wanted to sell, he said to me, oh, because I have something else that interests me. It's even got bigger and bigger potential, but it's an another industry and it's across country. It gets even worse than that. I love their lawyer, do the purchase and SafeLink. It gets worse than that. I relied on this accountant not at that time knowing he didn't really understand that certain things have been hidden. So he was he was in the dark on the shenanigans. So all the conversations I had with their accounting, remember, I didn't have one, I was relying on their thinking it was smart to keep the lawyer and accountant with the company. It took months after I got control of that company to negotiate with the unpaid vendors, they just absolutely would not perform unless I got a payment plan going. The the amount that was owed the company owed to these vendors, by the way I bought the shares. That's why I was responsible for all this another thing. Yep. The Linkwood. Some do. And it was seven times larger than what was represented to me before I bought it. So I was burning money three ways. When I had to hire lawyer. He wanted an upfront retainer. It was $30,000 in 19 $80. Then Monday went out the door because my consulting practice was shut down. I'm trying to bail myself out of the mess. And third, I was pumping my personal savings my money into this insolvent business to keep it afloat. Because if I didn't guess what I got to pay the liability on this firm's debt a whole year to untangle this mess.

Andrew Stotz 12:07
Could you have punished yourself any worse?

Ted Leverette 12:11
I don't think so. I was pretty bad.

Andrew Stotz 12:15
And one of the questions is, did you that I was thinking about as you went through it, like, did you have any recourse or they helped, they basically facilitated the deal, closed it down and made it such that you know, there's nothing you can say now that you can't say that they misrepresented something or anything like that, or?

Ted Leverette 12:36
Well, I call that my comeback store. Hmm, do you want me to tell you a little bit about it? Yeah. Okay, let me tell you this story, because I tell this to everybody. It's the most powerful lesson I learned and something I hope everybody remembers. It's the story of the ransom of redshift. And it's about two men who kidnapped a young boy from a wealthy man. Eventually, this kid drove the kidnappers so crazy that the kidnappers were. Well, they got the boy's father to pay to take the kid back. They gave up the ransom demand. And so what happened to me was how I got out of all this, and that story made it happen is that story is all about getting your just desserts, you know, turning the table on whoever cheats us. And by compelling them to a pay to pay the aggrieved person. This was me to get rid of me. These investors who had funded the company, these were very rich, prominent people. And they put money into this young guy who had developed this holding company, when I sued them for personally, for fraud and misrepresentation, because they were investors and they were signing off on the deal. The bottom line was they wanted to avoid the public disgrace, or the accusations becoming public, we did a settlement agreement, I got back all my money, I paid them, I got to forgiveness of debt. There was no bank financing, and I got to keep the company. And then, and then I reformatted the company and turned it into a franchise and made those 11 travel agents, the first franchisees, then I sold one area developer to help grow the franchise. And he liked the idea so much guess what he offered to buy the company which I happily sold to him and he moved on and did a wonderful thing with the business actually, about a year later a real big already well established franchisor in that in that travel niche bought his company, so everybody won. It works out for the jerks who defrauded me they took about

Andrew Stotz 14:56
Well, you could say that they wanted that they're done. teams weren't dragged into the mud. And they had to, you know, but they had to pay for that. So how would you describe the lessons that you learned from this experience?

Ted Leverette 15:09
Oh, good lessons. You know, it reminds me, it reminds I wish I didn't do this. But it reminds me of a story. The story is a few days after buying a business, the new owner lets me went to a fortune teller, a fortune teller and looked into a crystal ball and said, The fortune teller said to this business buyer, owning your business will be a living nightmare for the next three years. And the buyer asked, hopefully, and then what will happen. And the fortune teller said, well, then you'll get used to it. So here's the lesson, you know, this the sale and purchases of businesses, it really does seem like a good idea until things go wrong. So that's one of the lessons I was stuck at, because I didn't know what I didn't know. What they say is success does not always breed success. And I'm a living proof of that one. To two more tips on the lessons, the first thing is understand that sellers and their advisors, they do not tell buyers enough of what buyers need to know, to make informed decisions about buying the company. I'm not saying they're going to cheat people, they just don't simply tell it all. That second thing, and this is maybe more important is neither will the buyers advisors, not the individuals they need a team is that team that can finally ferret out the facts. One of the things I see in my career is buyers cheap out, and they don't hire the right kind of advisors, particularly lawyer and accountant. And they don't get those people talking to one another. Why? Because they don't want to spend an extra few 1000 bucks. Big mistake. Oh, one more thing. This is another lesson, buyer competition. That's competition amongst people looking for deals. That's what creates dumb deals. Because if you have to outbid the dumbest buyer, well, you're gonna not make a very good deal. What we do is we avoid or try to avoid that buyer competition.

Andrew Stotz 17:14
Well, let me let me summarize some of the things I took away from what you said, the first thing is, I was in a deal where we sold a company to Microsoft, and what I saw was an acquisition team in action. And it was impressive. The software, they gave it to a third party to evaluate it. And they use that they had all kinds of, you know, clawback type of clauses and all types of ways of forcing the seller to expose everything and be responsible if they didn't expose everything. And and then the actual transfer of the payment was contingent on the delivery of a large number of deliverables that were fair. And, you know, they were it was painful for the seller, but they went through all the process, and eventually, the deal was completed. And I think that that was my kind of first experience with that type of a deal. And I think due diligence is such a huge thing, you know, get into that business, understand what's going on in detail. And that's where I would highlight the other one, which I wrote down the word advocate, you need professional advocates that are fighting on your side. And as I always say, when I'm advocating as a financial adviser to the client, like in this case, I don't care about the other party. It is not my interest. And when when when we went to them, and they had made an offer for $50 million dollars. And I went back and said, This business is worth 200 million. And here's the five reasons why. When they scream and yell and complain, I don't care. Because I am advocating for my client. And so I want those kinds of people on my side that are advocating for me, which then brings me to the next point. Right now. I've had some experience with a particular company, where the auditor and the lawyer do not communicate. And it is caused an absolute mess. And unraveling the mess that has been caused, has taken years. I mean, it's crazy. And I think what I've learned in my life about what builds kind of competitive advantage in a business, the ultimate thing is I say, right CEO, choose the right direction, the right team, but most importantly, the coordination of the effort of the team. And that's where most of them fall apart because it's hard. It's painful. It's emotional. But you've got to get people to work together. And that's the point that you made about the auditor and the lawyer. And the last thing I wrote down, is strike back fast. Absolutely. That's what I kind of feel like once you realize what was happening, you got to strike back fast, every minute that you let it go, is giving them more power over the final judgement. So those are some of the things I took away anything you would add to that?

Ted Leverette 20:32
Well, when it comes to that team, one of the things I do I'm kind of, I'm known as a disrupter. The people who hire me usually have a lawyer or an accountant, and they think they need a dealmaker, like me to help balance that out. And it's often that I help my clients fire the lawyer and accountant, because we need people who do the kind and size the deal we do. We're not we're not big time m&a people, we're buying family owned businesses that another family is going to run. And so we want lawyers and accountants in particular, who are very good team players, and will try to facilitate, facilitate worthwhile deals, not be deal killers, just because they don't know enough. So we are people who know what the hell they're doing. And they're good at playing on a team. If you have that, then your advocates can wear the black hat with the other side of the table. We want our buyers to always be pure, we want them to always be lovable. If so bad news gets transmitted by the black hat, guys.

Andrew Stotz 21:30
That's a great point, let someone else be the bad cop. There's a couple of other things that I really thinking about now, because I'm also involved in another situation with a client. And what I see is, it's another deal. And the basically, if I heard someone say on a podcast, recently, there's no such thing as a bad asset, only a bad price. And I think if you're running a business, you could say there's some bad assets. But the point that the guy was making is that every single flaw that you come upon, can allow you to reduce the price that you pay. And in a particular deal that I'm involved in right now, the buyer has been excellent at tripping up the seller, at every time that they demand or ask for something. The seller scrambles has a hard time producing something. And then the buyer is like, well, that's another $50,000 off another million dollars off Oh, that leaves a liability that you know, we can't close that liability. You can't close it, therefore, we're going to take another million dollars off the price. And you just realize that every time. So I guess the point is, is that as you do your due diligence, ultimately, you should in theory be bringing down the price because you know that the seller is always coming to the table from an optimistic perspective. And that's that's what I that's what I learned from what I'm watching right now kind of unfolding in a particular transaction.

Ted Leverette 23:07
And there's a great silver lining in that. We love to find businesses that have fixable problems with an owner who's already sold the business in his mind, if he couldn't fix it, he wouldn't fix it. He didn't fix it. If we know we can I do mean if we know we can, hey, not only can we maybe chip off a little bit on the acquisition, but immediately after taking over, we solve that problem and we create cash flow have a happier company. So problems that are fixable are wonderful.

Andrew Stotz 23:38
Yeah, that's a great point. One last thing you got me so excited, I just love this discussion. The one last thing that I have learned and coming from kind of an accounting finance background and being a financial analyst, and my business partner is an expert accountant. Like I mean seriously expert accountant. But he's also ruthless and relentless when it comes to getting the numbers. I always give this advice to any business operator, get monthly financial statements that are on time and accurate for your own business. Forget about the buying of a business right now. Monthly on time and accurate financial statements, I dare you. And if you can get that it is the sign that your operating system, your accounting system and all that is in good shape. And then you have the ability to analyze your business. But majority of people put this kind of stuff off. Now from a buying if you're gonna buy a business, and it's not bad, but the accounting and the finances are a mess. Again, that's a fixable problem. But don't underestimate how long one of our clients that we do some outsource we do an outsourced CFO business where we try to help people fix problems. I always tell them that with accounting you either pay me now or you pay me later. If you want to skimp on accounting in the first year, there is a cost because if we've got to go back and reconcile what you spent last week, not too difficult. But if we got to go back and reconcile what you spent last week last year, is going to be much costlier. So the exponential exponentially grows. So if any listener out there has a business right now, and your accounting has kind of fallen apart a bit, focus on getting it back monthly, on time and accurate financial statements. So that's my last kind of comment. Here.

Ted Leverette 25:37
You're on almost family sized businesses were buying. You know, as I said, 20 to 50 employees. Most of them have lousy books and records. And here's this is what really makes these owners Well, kind of depressed, they ended up spending, maybe more money in that few months it takes to do a deal with us than they would have spent the last 10 years running their business, having proper books and records, the right kind of accountant and financial planning, they end up spending it all at the end, we benefited, the owner leaves too bad.

Andrew Stotz 26:10
Yeah, and it's an exponentially higher costs, when you have to spend it all at the end. So it's just so much great wisdom that you've shared with us. So let me ask you, based on what you learned from this story, and what you continue to learn, I just want to imagine go back in time to the guy that you were when you came across this deal. And you went through the process of this deal. Think about that young man or a woman out there that's facing the same situation right now. What's one action that you'd recommend to our listeners to avoid suffering the same fate?

Ted Leverette 26:45
Don't be a do it yourself or lean on people who know what they're doing. Read books on the topic from legitimate deal makers, avoid the charlatans out there as trying to sell advice to people buying businesses, you know, the no money down get rich, quick junk. In other words, do your homework before you go into the playing field. Because no matter how naive you think a business owner is, chances are his lawyer and accountant are not that naive, and they will help negotiate you and you could end up in a bad deal like I did.

Andrew Stotz 27:17
So what's a resource of yours that you'd recommend for our audience?

Ted Leverette 27:22
Well, thanks for asking, too. Two books. One, if you're looking for a business to buy, and you want to know how to start, I wrote a book called How to prepare yourself and find and buy the right business, or how to prepare yourself and find the right business to buy it. Okay. And the other book is, if you're looking at a business that's for sale, you've already found it. Well, how to buy the right business the right way, because that's got all the tactics necessary to investigate a deal and do a deal. There's like in both books, or each of them have 500 different tactics, no theory, no fluff, none of this creative business plan. Baloney, is the stuff that actually happens on the playing field tactics.

Andrew Stotz 28:05
Well, I'll have links to both of those in the show notes. And my last question for you is, what's your number one goal for the next 12 months,

Ted Leverette 28:15
keep on doing what I'm doing, trying to save the lives and money of people who are looking for businesses to buy.

Andrew Stotz 28:22
Beautiful. And ladies and gentlemen, when I describe this podcast to people who consider coming on, I say that it's about Authenticity. Authenticity means that people who come on this podcast are willing to share their worst investment and then proceed to describe what they learned from it. And that's the kind of people I want to do business with. So Ted, I want to thank you for coming on the show. And listeners, there you have it another story of loss to keep you winning. If you haven't joined the become a better investor community, just go to my worst investment ever.com right now to claim your lifetime discount exclusive for podcast listeners. As we conclude, Ted, I want to thank you again for joining our mission and on behalf of A. Stotz Academy I hereby award you alumni status for turning your worst investment ever been to your best teaching moment. Do you have any parting words for the audience?

Ted Leverette 29:16
Yeah, I want a certificate a trophy that I can brand us. There you go. Thanks, Andy. This was fun.

Andrew Stotz 29:25
Well, that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person, Ted, to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz. And I'm going to tell you that I'll see you on the upside