The question that this episode is all about is this: What if you could skip the whole startup phase and generate profitable revenue on day one?

Entrepreneurs have a big issue. We want to start things up, we want to build, but statistically speaking, we also know, we’ve got a 90% chance of failure. Walker Deibel, the author of Buy Then Build, is much more into the acquisition model to buy companies.

Walker is an entrepreneur and an investor and he’s co-founded three startups, so he knows that side of the game. He’s also acquired seven companies and from all this experience, he has become a huge believer and proponent of the ‘Buy Then Build’ model. To acquire the infrastructure of a company first and then to go on doing all the things that you as an entrepreneur want to do.

It’s serving customers, building something meaningful and sustainable and turning a profit by solving people’s problems, that’s what this episode is all about. If you’re an entrepreneur who has got several failures or difficult businesses under your belt and you’re looking for a better way of starting up, this is the episode for you.

Walker Deibel: In 2004, two things were happening. One, I was finishing up at Washington University in St. Louis. I was finishing up grad school, it was the MBA program full time. During that program, me and a couple other classmates started a business.

We were in business planning competitions, we were talking to customers, we were raising money. We were a finalist in a competition, we had very big potential customers deep in the pipeline and looked like they were going to buy.

The month of our graduation, just because of licensing rights, the whole startup got hung up in legal and completely failed.

Me and one of the other guys that were starting this company were the only people in the entire class that didn’t have jobs lined up. Here we went, graduation day, no job because I’m an entrepreneur, I’m starting a business, right?

“It completely failed the day before graduation.”

I went out into the world, and a couple of things that happened at once. First, I understood that entrepreneurship isn’t a job, it’s a condition. You just sort of are. Here I was, the unemployed entrepreneur. I didn’t have another idea hot off the press, queued up. I didn’t have an excuse. School was done, right?

Here I am out in the workforce with no idea, my startup failed, nowhere to go.

I could go corporate, and I kind of started to go that direction, but the thing is, I wanted to find a business to buy. I knew that you could do it. I knew that people did it and that they were financeable and all the rest of it. But I met two things. One, my MBA education really trained me to be either a middle manager at a large organization or a consultant.

It really was very little to do with small business management and operations.

A lot of it is transferable, but it’s indirect.

The second thing that I found was, when I went to try to find a business to buy, here I am, I’m in my late 20s, I look 10 years younger, I’ve got no money…I know I can do this, I just don’t know the path. What I’m met with was a really opaque industry that is very fragmented. The range of people that are trying to sell businesses is enormous.

I mean, everything from a guy trying to sell you a promotional items company out of the trunk of his car in the alley to literally a MNA advisor posing as an I-banker that really doesn’t want to look at anything under 20 million. Anywhere in the middle, you sort of get business savvy people who got into brokerage later in their career or people that really have never run a business at all who are just kind of trying to sell things that they think will sell rather than actually being deal makers.

I felt kind of lost, and I couldn’t get it done. Although I had spent, let’s just say, six months really trying to find a business and find that path and a way to do it, I really just kind of failed. I couldn’t figure out the right way.

Finding the Right Business

Charlie Hoehn: How were you searching? Were you asking fellow entrepreneurs?

Walker Deibel: Yeah, that’s just it. A lot of it was just going towards trying to find a local business broker, looking at listings, there are websites like bizbuysell out there. One of the things I get in to in my book, Buy Then Build, is that most people who go out looking for a business, go about it completely the wrong way.

It’s approximately 10% of people that start looking for a business that ever actually buy one. I think there’s a couple of reasons for that. Maybe we’ll get there, but the point is the following: I did it exactly like everyone else does. Completely wrong. Looking for a business to buy online is sort of like trying to find a job on

You’re somehow looking at a thousand jobs, but I don’t know anyone that actually has ever gotten a job and you don’t want any of the jobs listed.

The public market places have this kind of lowest common denominator sort of variable to them. Even if there’s a gem in there, it’s even hard to see because it’s surrounded by maybe other businesses or other jobs in this analogy that obviously have no interest to you.

Charlie Hoehn: Yeah. I’d imagine that a part of the problem as well was you were kind of like, “I just want to have a business,” right? It’s kind of a broad target. It would be like, if you’re looking for somebody to marry, you’re like, “Okay. I need a woman.”

Walker Deibel: That’s it, you nailed it. Basically, most people who start looking for a business, they have no concept of what they’re looking for. I recently met up with a couple of ladies who had been looking for a while, just asking them questions about what are your skillsets, what’s your approach, what’s the growth opportunity that you would be looking for? And on and on.

They both looked at each other and said, we should have bought that company that we looked at last month.

That company was no longer available but again, they were standing there analyzing the business that they should have bought.

Basically, it was biting them. They still didn’t know if it was the right business for them or not until they looked back and understood that it had all of the right variables for the business they needed to find.

Why Buy a Business?

Charlie Hoehn: Let’s take a step back and just talk about why even do this? I mean, everybody tells you to build, what is the opportunity here?

Walker Deibel: Yeah, despite the popularity of entrepreneurship, we really haven’t engineered a better way to succeed at starting up. There’s a lot of little sub segments to entrepreneurship.

When I was at Wash-U, our emerging entrepreneurship program at the time was basically how to raise a bunch of capital so that we could build this infrastructure that was later going to generate money. It was a swinging for the fences, home run, VC-backed method.

However, as I became into my 30s and started managing my own business, what I found is that nine out of ten startups don’t make it. What I found was that most of the successful entrepreneurs that I was surrounded myself with were people that really had a one, two, three million dollar business.

“Only 4% of companies in the United States ever exceed a million dollars in revenue.”

What that means is, if you put these numbers together, 10% of a percent of startups make it, right? Then, when you look at that 10% that make it, 96% of them never reach a level of safety. They’re under a million. I would guarantee that people that start businesses are not trying to hit $700,000 in revenue. They never really reach that scalable level.

Let’s back up. What is the goal of a startup? You could say, okay, the goal is to build an infrastructure from scratch that then generates profitable revenue. In other words, I need to get past the startup phase and get to a point where I’ve got some sustainability in my business. That’s kind of step one.

If you buy an existing company, you’re buying that profitable infrastructure right from day one.

It might sound like, “Well Walker, that sounds like totally unaffordable—you must be loaded!” Well, here’s what I’m going to tell you. If you are trying to start a business from scratch, most people either put in a little bit of their own money or they’re trying to raise money from someone else.

If you raise money from someone else, you’re kind of raising it at this future valuation, hoping that one day you’ll be worth that. The people that give you money are trying to build you that infrastructure so that you can be. When you buy an existing business, it’s priced as a multiple of the profits, okay? You’re paying for the infrastructure at a very reasonable value based on prior history.

Walk in, buy that company with bankable assets supporting it, and you’re off to the races on day one. The average investment into a startup in the United States and a down payment for a company that’s between one and two million dollars in revenue is pretty equivalent.

Who Should Buy?

Charlie Hoehn: Are there people that you say, “No, you actually have the wrong mindset for doing this type of thing, you shouldn’t do it?”

Walker Deibel: Let me reverse the question. Basically, the first stage of operation is attitude, right? The very first question is, are you an entrepreneur or not? This question. I didn’t make it up—that became part of the format because when I give talks, I always ask the room, “Okay, everyone is here because this topic interested you. What are the questions that you have?”

Most of the questions you would anticipate, but if you can imagine a bell curve, you always get way on either side. Someone will stand up and say, “Look, I’m closing tomorrow, what do I do?”

“Okay, I need to talk to you later, that’s not what we’re talking about today. You’re way ahead.”

Someone else will raise their hand and be like, “Look, I have a medical degree, how do I know if I have what it takes?”

A lot of entrepreneurs already know, because they sort of have the condition. But buying and building is slightly different. You’re going to skip that dreaming phase and pulling it together phase. There’s a little bit of a fast forward to just straight operations.

You sort of reverse it, because later, you get that opportunity to innovate and grow depending on what your goals are. But the truth is there’s something working right now that you need to kind of master, right?

The first thing that you need to do is understand that you are of the fabric.

When we look at the psychology and the buildup of successful entrepreneurs, they all have the same thing. At the end of the day, it’s this: It’s an intelligent and driven individual running after a good opportunity.

It doesn’t have to be a great opportunity, mind you.

“It needs to be a good opportunity, and that entrepreneur needs drive to push it.”

If you don’t’ have that, stop.

There is another thing, and that is the risk profile. You need to understand how comfortable you are understanding that the upside all belongs to you, but the downside belongs to you too.

If it doesn’t work out, it’s on you, and you need to be able to live with that. I think a lot of us think that we would be good in those situations, but then when we really push ourselves and look it in the face and say, “Could I really do this?” they kind of start to tremble a little bit. There’s a lot at stake.

Entrepreneur or CEO?

Charlie Hoehn: We’re talking about entrepreneurs but isn’t this really becoming a CEO? Are you buying the business or are you running the business?

Walker Deibel: Basically, it can go a lot of different directions. Let me say it like this.

I just wrapped up building an online course to go along with Buy Then Build—it’s actually called Six Months to CEO. The point is that a lot of entrepreneurs start a business and then a switch happens.

We use the word entrepreneur to talk about the people who are working for themselves or starting from scratch or just making it happen, creating value somewhere, right?

“More often than not, those entrepreneurs have the title CEO.”

You can look the CEO of Apple and say, is he a CEO, or is he an entrepreneur? I’m not sure anymore. The best entrepreneurs are CEOs and probably vice versa. Let me pull it around though. I think there’s a couple of reasons why most people fail when they start looking for a business to buy.

The first is that they are not working on a set timeframe. I called the course six months to CEO because I really wanted to hit home the goal. Trying to set a timeline that you are holding yourself accountable to creates a sense of urgency and forces you to say real yes, real no, real next steps at every stage.

It doesn’t mean that you should sacrifice good decisions in order to hit the goal of six months, but the concept is that you absolutely, without a doubt can start your search and be closed and operating a company within six months.

It doesn’t have to be this long, meandering, tire kicking thing as long, as you have a process.

Look Inward First

Charlie Hoehn: Let’s talk about finding the right opportunities. How do you get clear on the target, so to speak? How do you find the right place?

Walker Deibel: Okay, I think that a lot of people, when they’re looking for a business, the first thing that happens—and this is kind of a mistake—is that it’s like an early form of dating. At least, the kind that my dad told me to approach, which is go date everybody and see what you like. They just sort of like go out into the wild and see sort of what’s on the menu, okay?

I mean, I get it, that’s fine. If you need to do that, you know do a little bit of that. It has a complete lack of process, right? It leads to tire kicking and wasting time. Not only that, but it’s sort of like they’re waiting for the business to sort of emerge, you know, out of a waterfall and with the rainbow or whatever.

It usually looks a little run down, a little tired and needs someone just like you to get in there and make it happen.

“The business you are looking for, plus what you bring to the table, is the business that you’ll be managing.”

If we reverse this equation, the most important thing between you and the business you’re going to buy is you.

Before you go out and start looking at a business, I really encourage acquisition entrepreneurs to spend the time honing what it is that they’re good at and where they’re weak. In other words, if I’m a really great operations person, I don’t necessarily need a company with a really great operations already in place, right?

What I need is where I’m weak. Let’s say I’m not strong at sales and marketing. I need some kind of sales operation or sales process that’s functioning correctly or some kind of product market fit that’s already in place so that I can focus on lean manufacturing or whatever it is that I do.

To reverse that, it’s exactly the opposite. If I’m really bad at accounting and I know enough just to screw it up but I can really push the revenue number up, that’s not a bad place to be, because accounting is really easy to hire out. In that instance, you might be looking for things with stronger books, more verifiability, because you need a little more help in that area, whatever.

“You need to first understand your own strengths and weaknesses before you move forward.”

The second thing is you need to consider how you want your day to day to look once you actually close on a business.

I help online entrepreneurs exit their businesses. And one of the things that makes businesses in that space attractive is there is a lot of the 4-Hour Workweek going on. It’s like you can go out and buy a company that is generating a couple million dollars in revenue and maybe it’s not four hours but maybe it’s 10 to 20, right? That makes a business very attractive to a lot of acquisition entrepreneurs in that space.

Charlie Hoehn: So just to clarify, are you referring to people who are selling products, physical products or digital products online and it is just low overhead, low maintenance?

Walker Deibel: That’s right. Basically online businesses tend to have fewer employees and less physical infrastructure. So whether it’s an e-commerce or a drop ship or a content site or even like a SaaS company, as long as there is whatever is making the thing go—maybe if Google AdWords drives the business, you don’t need to be sitting there looking at Google AdWords every minute of the day, right?

So these businesses very much exist, and for passive investors or people that want to build a portfolio of passive investments like they would real estate or something, that’s a really good place to go.

Going back to that example of this operations expert, someone who knows how to implement lean manufacturing processes and really grow a bottom line, that person is not looking at all for some kind of passive investment.

They’re looking for something they can get in potentially buy for a very reasonable multiple and pump up the performance of the business and earn money that way. It is a totally different profile.

The Search Process

Charlie Hoehn: Yeah, so how does the search really begin? Walk me through the steps to find these businesses.

Walker Deibel: Yeah, so there is one more critical thing. Once you identified your strengths and weaknesses and how you actually want to be spending your time, are you going to a physical location or are you on a beach drinking a margarita while your business is running on autopilot?

Once you determine these things, you really need to match your strengths with the growth opportunity the business provides. I think that right there is the thing that most people miss.

They quite can’t see it, because a big reason for that is because when we go buy a business, you are looking at the business as it exists today.

“What you’re paying for is the prior history of the business.”

That is what the value is based on. So a lot of people will look at it in terms of trying to analyze the business as it exists today, but again, that is totally backwards. What you need to identify is the growth opportunity that the business provides, and does that growth opportunity match your skillset? I so, that’s your business.

Charlie Hoehn: Walk me through the search a bit.

Walker Deibel: Because it is so opaque and fragmented and people don’t really know how to do it, this is what I am going to tell you. Number one, don’t go online. Don’t go spend an hour, two hours, an evening of your time sifting through online market places. Get off them, okay? Because it will make you depressed.

What you want to do is, is you need to generate deal flow yourself. And what that means is, is that think about it like this. If I am a MNA advisor and I help businesses exit, when I get a new listing, a new company that wants to sell their business, the first thing that I am going to do is talk to the other advisors in the office.

I am going to say, “Hey, who do we know that would want something like this?” I might reach out to a couple of people that I think are going to buy it right before it comes up, then I might send it out to our private list of vetted buyers.

And then eventually, if no one buys it, then it moves and finds its way onto an online marketplace. That does not mean only bad ones run online market places, but we’ve touched on that already. The point is that the good ones are upstream. So what you need to do is get upstream and introduce yourself and get in front and be top of mind with the brokers and the advisors that are going to get the businesses that are going to fit your profile.

Charlie Hoehn: How much work does that require? I mean what does that typically look like in, I don’t know, a given month of doing that?

Walker Deibel: It is not as hard as it sounds. Imagine you’re interviewing for a job or say you are looking for a job. You need send out resumes and go on a bunch of interviews, et cetera. So let’s say that one of your limiters is, “Look, I live in Chicago and my kids go to school here and my in laws live here. I am not going anywhere. And I am not interested in tech or online in any capacity.” Your limiter is geographic.

That becomes pretty simple to manage. So you simply hit Google and look for the business brokers, the MNA advisory firms, and any middle market investment bankers, and then you simply come up with a hit list and you start making the rounds.

You call your CPA, you might talk to accountants, and you start saying, “Hey here is what I am looking for.”

And since you know the growth opportunity that you are looking for and you know your skillsets, you are able to communicate pretty effectively by that point in terms of what it is that you are looking for.

It is also a two way interview, right? So the first business broker I ever met with in 2004 was trying to sell me a pet cemetery, literally. It was like you mowed the lawn and I guess if someone didn’t send in their check you dug up their dead cat or something. I am not sure.

The point is, is this broker was not close to operating at the level of where I was. It just comes back to the opacity, the fragmentation, and the range. So it’s a two way interview.

Building vs Buying

Charlie Hoehn: So how do you turn down such an attractive deal when it comes across your desk?

Walker Deibel: You get a lot of laundromats, tired restaurants and bars and things like that, and that is not what we are talking about here. We are talking about something that you can grow, that you can innovate, something that has an existing customer base that you can leverage with a new product—something along those lines.

Once you start building your network and actually start generating deal flow…After I sold my first company that I bought, I ran it for seven years and then I ended up selling it accidentally almost to an acquisition target, which is a different story. But anyway, I went out and did another startup.

We had recruited an executive from Microsoft. We had recruited an executive from Disney. We had a proven dev team that was building software for the US government that was in use and mobile software. We went through one of the top 10 accelerator programs in the world.

We were oversubscribed, we were running beta programs at a half a dozen branded big names that you would know.

“Eight months later, we had no money, no paying customers, and were shut down.”

The business program who ended up helping me exit my prior company called and said, “Hey how is that startup going?”

I said it was a little rocky, and he said, “Good! There is this business. It is a perfect fit for you, you’ve got to see it.”

I was like, “Okay, okay.” So I went in and I looked at it and I did eventually acquired that company. It took a few months for me to get my head around it, but all of a sudden, what I saw was the growth.

This was the thing that led to this piece in the book: It was not what I’m looking at, it is what it can be and what we can actually do with it.

I think that the broker knew that about me, and he knew my skillset, and what he saw was a platform where I could get in and really leverage the infrastructure they had and the customer base they had to build something truly unique, which we did.

We ended up using the cash flow of the company to build up a proprietary e-commerce store front, which we then rolled out to almost 20,000 users within eight months of me buying the company—mind you, this was everything we were trying to accomplish at the startup and completely failed because it statistically is the outcome.

The Entrepreneur’s Journey

Charlie Hoehn: Part of me wonders, how much do we really want the end result versus how much do we want to feel like we went through this arduous difficult hero’s journey and we came out on top—even if it means we have such a high likelihood of failure, well at least we tried it the old fashion way rather than the smart way.

Walker Deibel: It is such a good question. I have done both, so I can totally relate to that and I guess it is one of these where it doesn’t ever get easier.

So in 2010, I was the Missouri State Champion in cycling. I hurt my knee in a running injury, so they told me to ride a bike for physical therapy, and then four years later I went on to win state champion. I am aggressive, I guess. I am an aggressive hobbyist.

But anyway the point is when you are first starting out and then you go on the shop ride or whatever and you’re like, “Man these people are fast. I don’t know if I can stay with them,” all the way to toeing the line of a race where you might actually win, it never gets easier. It just gets longer and harder.

So I think that when you buy an existing business, you are outsmarting that startup phase, which is that company killer.

You are buying a platform that is proven and operational, but now the fun starts, because it is fully bankable. You can own the company 100%.

Look, you never stop worrying about cash flow. It never ends. But the point is, it is not like you are on a cash burn. So now it becomes, “Okay, I’ve got this company—how do I grow it? How do I innovate it? How do I get on trend with what’s happening in this industry and change it so that we can be the next big thing?”

Let me give you an example.

I bought a book printing company in 2006, picking up momentum immediately after the iPad came out. The Kindle came out. Bookstores were going out of business, newspapers were going out of business. Print was dead, was the belief, right? No one in my age group plus or minus 10 years was touching the printing industry. It was a disastrous time.

What I saw was the best opportunity since Gutenberg in that industry, and here’s why.

Although offset printing—which is long run book printing—was declining massively and newspapers were going online, bookstores were going out of business because people were buying books online…they were still buying books. Sure, there was surge in eBooks, but the large majority of books that were being read were still printed materials.

What was happening was a change in the supply chain. Because of advances in technology, people were no longer having to buy long runs in order to get their unit cost of goods down. But rather, they could buy short runs because of digital printing and just order more often.

So the challenge was, how do we take the infrastructure of all of these pre-pressed technicians and all of the publishing companies that we did work with and implement a digital printing facility in our company and then turn around and be the solution to the trend for all of our existing customers?

Within 18 months it was probably 20% of revenue.

I don’t mean that to sound impressive. It is just not any easier or any different than starting something from scratch.

It’s just that you’ve got a tailwind, right? If you read Eric Ries’ The Lean Startup, it is all about getting that customer feedback loop. When you buy then build rather than starting from scratch, guess what? You have a statistically significant amount of customer feedback immediately at your hands.

Connect with Walker Deibel

Charlie Hoehn: I’ve got a couple more questions for you Walker. The first one is, what is the best way for people to either get in touch with you or follow you in your journey?

Walker Deibel: Probably the best way would be through the Buy Then Build website. I mean is a great way to get a hold of me. I am also obviously on social media @walkerdeibel.

Charlie Hoehn: Perfect and the second question I have is can you give our listeners a challenge? What is one thing they can do from your book this week that will have a positive impact?

Walker Deibel: What a great idea, okay here’s the challenge: In my book, what I tried to write is just a manifesto for failed entrepreneurs, right?

Charlie Hoehn: A much needed manifesto.

Walker Deibel: Right but when you start looking at the empirical evidence, all data supports this as a way of practicing entrepreneurship with a margin of safety. The challenge is all of these entrepreneurs that are out there who are listening and they’ve got their idea and they are trying to think, “If I just built this thing, it could go.”

Here is what I want to add and here is what I want them to think about: I want them to identify exactly what the infrastructure is that they would need in order to launch that product or launch that SaaS or launch that idea. Then I want you to translate that into what it would look like as an existing business.

Because if you go find that business, they will be totally surprised at how affordable and how simple it is to actually acquire that infrastructure rather than starting it from scratch.