Investing through the acquisition of small businesses is another route to passive income. Right now we believe it is one of the best routes based on the market and opportunity. One initial mistake buyers need to avoid when they are looking for more passive investment opportunities is to make sure they are buying a business and not a job. See E-Myth Revisited or The Cashflow Quadrant for more information on what that means. (Book links are Amazon affiliate links. If you use them we get a small commission for the referral, feel free to search them on your own if you prefer.)

Essentially it comes down to leverage. More importantly it comes down to human capital. Your ability to find, hire, and retain a top team to operate your business will determine the level of passivity in your investment.

     “I am convinced that nothing we do is more important than hiring and developing people.  At the end of the day, you bet on people, not on strategies.” – Lawrence Bossidy


Profit vs. Pay

We know we drill it into your head but we’ll say it again for the kids in the back!! Make sure there is enough profit in the deal to afford your quality operator to run your business and still achieve your own personal profit goals. A site like www.glassdoor.com can help for your research. For instance if I were buying an auto repair shop, I would likely need to pay someone $60K a year with some bonuses to manage the business according to them.

Spend the time to find the right partner. THE BEST PARTNER OR OPERATOR. Always is one of two things: someone you know and trust or someone who has done the job before. We prefer to not have people to learn on our dime as often as possible. If we can bring someone up in the business it’s ideal. If we can’t do that than we go and find someone, ideally again someone who has done it OR who is a known commodity to us.

Make your search as expansive as possible. Post on indeed, craigslist (depending on the role), social media, call managers of competing companies, reach out to people you know and ask for recommendations for their favorite mechanic, etc. It will be worth going through all the applicants.

You can hire proven talent or potential talent. Proven talent may already be a Manager at a local shop. In this case I would call around to Managers at local franchises or companies. I would ask them to call me back in their off-time if they are interested in an opportunity to run their own garage without the constraints of franchise rules. Proven talent will likely cost more in compensation initially. Potential talent requires more time and training.

“If you think it’s expensive to hire a professional, wait until you hire
an amateur.” – Red Adair

Consider a bonus-based pay or an earn-in or buy-in for equity. Tie the outcomes you are looking for to their personal goals through their compensation package to align for win-wins.

Look for experience as well as leadership in their past. The past is the best predictor of future. If someone was the captain of their baseball team, a military officer, a leader in a past role, they will be more likely to be a great leader in your company. Skill can be taught, but leadership often shows up on a resume prior to the hire. Sometimes you can promote someone into leadership that has the skills if they have the right culture, hustle, goals, and skills in the trade, but often I would trade skills for leadership ability. A leader will step up to learn what they need to know to lead effectively. A skilled laborer cannot always step up to lead.

The four main things I would be looking for during the interview process…

Finding the Right Partner

1.) Experience in the trade and leadership experience. Dig into their experiences with them by having them run through every job on their resume. What did they do? What did they love? What did they hate? What would they have done differently?

2.) Culture – Do they fit the core values of your company? Better yet, do their core values align with yours?

3.) Goals – Do their future goals align with the opportunity? I don’t want to have to hire another person in a year if they outgrow this job unless I have somewhere for them to move up, and they can hire their replacement. This isn’t just about their compensation goals. What do they want their life to look like in 3-5 years? How can they see this position helping them to attain those goals?

4.) Behavioral Assessment – I am a huge believer in using a behavioral assessment for hiring especially in leadership roles. Not every role requires the same behavioral patterns, but people have different natural patterns and using an assessment like the DISC or Myers-Briggs will often help determine if they are a good fit for the position. It’s not to say if they are not a job match that they cannot succeed, it just means they will consistently asked to do things outside their natural behavior pattern and over time that can wear on people. I have personally found that the right assessment match is a strong indicator of success in a role. There is no right or wrong answers on theses assessments. Different jobs are a better match for different patterns. One is not better than the other. This course is not meant to teach about behavior assessments, but they are a great resource, and if you are hiring operators I would suggest taking a course on how to use and interpret these reports.

Come along for the ride with us. If you want to learn about becoming a dealmaker register for the course here OR if you are serious about buying a small business, join our Mastermind.