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Robert Nance accidentally acquired a Mexican food distribution business along with a building he bought for his real estate business. This accidental business opened his eyes to the potential of cash flow investing. He focused on B2B wholesale distribution businesses that were owned by baby boomers looking to retire. Robert developed a strategy for mitigating risk in acquisitions, including setting floors and ceilings for assets and liabilities and using owner financing. He emphasized the importance of understanding the balance sheet and real-time financial health of a business. Determining the value of a business, especially seller discretionary earnings, can be tricky due to interpretation. Okay, so we're diving into some really fascinating stuff today. This whole idea of businesses as hidden gems, those kind of deals that most people wouldn't even know to look for, and we're really lucky to have some great insights from Robert Nance for this deep dive. Absolutely. He's this guy who went from developing real estate to owning a whole bunch of businesses, like over 25 of them. I know. That's pretty impressive. And you were particularly interested in how he made that transition, so we're going to break that down. Let's get into it. But first things first, who is Robert Nance? So, Robert's story is interesting because it kind of slips the script on the usual real estate game. Okay. How so? Well, he actually acquired his first business by accident. It was a Mexican food distribution company. When you just sort of fell into owning a food distribution business? Pretty much. It was back in 1999. He bought this building in Dallas for his real estate business, needed a bigger office. Makes sense. So, he sold down this property for $1.2 million. But here's the thing, it came with an existing business already running inside. No way. So, he got a business as like a bonus with the building. Exactly. It was practically a buy one, get one free situation. That's wild. So, this accidental business, this Mexican food thing, that was like his big breakthrough moment. It really was a turning point for him. See, at that time, he was already successful in real estate. Right. But managing that free distribution business kind of opened his eyes to a whole different world of possibilities. Like what? Cash flow. He realized that this business, even though it wasn't his main focus, had this amazing potential for generating steady income. Interesting. So, it wasn't about the property itself, but what was happening on the property. Yeah. You got it. It was a real shift in perspective for him. He had all this equity tied up in real estate, but the actual cash flow wasn't quite where he wanted it to be. And that distribution business showed him a different way. Exactly. It was about becoming a strictly cash flow investor from that point on. And he decided to really double down on a particular niche B2B wholesale distribution company. Why that specific type of business? Was it just because of that first accidental acquisition? It was more than that. Robert noticed some key things about B2B wholesale distribution. First off, they often deal with essential products. So, there's always a demand. Exactly. Then there's the recurring revenue. These businesses usually have established customer relationships, so the money keeps coming in. Reliable income streams, if that makes sense. But the real kicker was the timing. Robert realized that a lot of these businesses were owned by baby boomers. Getting ready to retire. Exactly. And they were looking for someone to take over, so he was in the right place at the right time with the right kind of opportunity in front of him. So, he's finding these businesses that are already established, have a built-in customer base, and are potentially undervalued because the owners are looking to exit. You got it. And because he was so focused on this one type of business, he became like an expert in their operations, their financials, everything, so he could see potential that other buyers might miss. Okay. So, we've got a real estate guy, stumbles into the acquisition world, figures out the power of cash flow, and finds this whole niche of businesses ripe for the taking. Sounds almost too easy. Right. I'm guessing it's a little more complicated than that. You would be right. Identifying those hidden gem businesses is really just the first step. The real challenge is in structuring the deal to make sure it's a good investment. And that's where things get interesting. So, how does he make sure he's not buying someone else's problems when he's looking at these businesses? And that's the million-dollar question, isn't it? Mitigating risk. That's one of the biggest challenges in acquisitions. Yeah, especially with these privately-held companies where you don't have the same level of public scrutiny as a big corporation. Absolutely. And Robert's really up front about the fact that he's encountered his fair share of what he calls undisclosed liabilities. Undisclosed liabilities. So, basically, hidden financial obligations that only rear their ugly heads after the deal is done. Exactly. And they can really hurt you. It's like buying a house only to find out later there's a leaky basement and faulty wiring that you now have to deal with. Except probably with a lot more zeros involved. Oh, absolutely. We're talking about potentially significant financial hits here. So, Robert's learned over time that you can't just rely on traditional due diligence. So, he has a system for sniffing out these hidden liabilities. You could say that. He's got a whole strategy for risk mitigation, and it starts with how he structures the deal from day one. Interesting. So, it's not just about combing through the books, but about setting up the right safeguards in the actual purchase agreement. Precisely. It's about having a rock-solid contract that protects him and his partners. And that's where this floors and ceilings concept comes into play. Floors and ceilings. Okay. Now, you've piqued my curiosity. What in the world are we talking about here? So, imagine you're looking at the balance sheet of a business Robert wants to buy. He takes key assets, things like cash on hand, accounts receivable, the money owed to the business, and he sets a floor. So, this floor is the absolute minimum value he expects those assets to have when he takes over. Exactly. It's like a safety net. And then on the flip side, he sets ceilings for certain liabilities. Things like accounts payable, any outstanding loans, that kind of thing. So, he's saying, this is the most I'm willing to accept for these liabilities. If they're higher than this, we need to talk. You got it. It's all about setting clear boundaries. And here's the kicker. It's all tied to the down payment. Okay. How so? So, let's say those key assets dip below the floor at closing, or those liabilities shoot through the ceiling. Yeah. The difference. That difference comes straight out of the seller's down payment. Wow. That's pretty clever. It puts some skin in the game for the seller to be truthful about their financials. Exactly. It's a powerful incentive to make sure everything's on the up and up. But that's not all. Robert has another trick up his sleeve when it comes to mitigating risk. Oh, there's more. All right. I'm hooked. Lay it on me. He's a big believer in owner financing. Owner financing? You mean, instead of going to a bank, the seller actually finances part of the deal? Precisely. It might seem counterintuitive, but it actually makes a lot of sense when you think about it. I'll admit it. It sounds a little strange. Why would the seller want to lend money to the person buying their business? Well, remember those undisclosed liabilities we talked about? With owner financing, if those hidden costs pop up, Robert can actually adjust the payment terms with the previous owner. Ah. So, it's like an insurance policy against those financial surprises. Yeah. The seller's still on the hook to some extent. Got it. And it also gives Robert more control over the deal. He can often close transactions much faster this way than if he were dealing with banks and loan approvals. And time is money, as they say, especially in the business world. Absolutely. Robert's all about speed, but never at the expense of due diligence. He actually told this crazy story about a seller who tried to pull a fast one right before closing, tried to manipulate their cash flow to make the business look more profitable. Oh, no. What did they do? Cook the books? Kind of. They were doing something called playing the float. What's that? Basically, writing checks for liabilities, but not actually recording the deduction from their cash account until those checks cleared. So, it's like creating this illusion of having more cash on hand than they actually did. Exactly. A sneaky way to inflate their financial position. That's wild. How did Robert even catch them in the act? It was a close one. His CEO at the time noticed some unusually large checks clearing the bank, even though the deal hadn't officially closed. When they confronted the seller about it, you know what they said? What? Oh, we were just playing the float, as if it was totally normal. Like, it's no big deal, just casually manipulating your financial record. Crazy, right? It just goes to show why Robert stresses the importance of really understanding the balance sheet. Because it's a snapshot of the company's financial health at that exact moment in time, not some historical record that could be in the side. You got it. He always says the balance sheet is much harder to manipulate than the income statement. It gives you a clearer picture of the assets, liabilities, and equity. So he's not just looking at whether the business made money last year. He wants to know what their financial position is right now. Precisely. He's all about that real-time snapshot. But even with a solid contract and a careful eye on the financials, there are still some tricky areas to navigate in a deal. Like, how do you accurately determine the value of a business, especially when you're dealing with something as subjective as seller discretionary earnings or SDE? If you hit the nail on the head, SDE can be a real sticking point in negotiations because it's open to interpretation. Okay. So SDE, seller discretionary earnings, what makes it such a tricky thing to nail down? Well, it all comes down to how you calculate it. See, SDE is essentially a measure of the business's profit, but specifically the profit that goes directly to the owner-operator. So it's different from the net income you'd see on a regular financial statement. Exactly. SDE takes into account things that wouldn't be reflected in the net income. Things like the owner's salary, any personal expenses that might be running through the business, even one-time expenses that aren't likely to happen again. So it's about getting a truer sense of the earning potential for someone who's actually going to be running the business. Precisely. It's meant to give potential buyers, like Robert, a clearer picture of what they could realistically expect to earn. And this is a big ... But because SDE involves some judgment calls about what to include, it can be manipulated. Manipulated. Also, what are some of the tricks sellers try to pull? Oh, Robert's seen it all. He's had cases where sellers inflated their own salaries to make the profits look smaller than they actually were. Sneaky. Right. Or they'll try to pass off personal expenses, like vacations or car payments, as business expenses. Okay. So they can add those back into the SDE and make it seem like the business is more profitable. Exactly. They're trying to bump up that SDE number to get a higher price. It's like trying to sell a used car and saying, oh yeah, the engine's got a little knock, but that's an add back. It actually makes the car more valuable. Exactly. That's why Robert is so meticulous about due diligence. He's not just looking at the numbers. He's trying to understand the story behind those numbers. So it's not enough to just crunch the numbers on a spreadsheet. You have to be almost like a detective. Exactly. You have to connect the dots between the financials, the industry, the seller's track record. It all plays a role in getting to the truth of a business's value. And that leads us to what I think is one of the most impressive things about Robert's approach. You mean his focus on partnering with first-time business buyers? Absolutely. He's not just out there buying businesses for himself. He's created this whole program to help aspiring entrepreneurs get into the acquisition game. It's like he's paying it forward, sharing his knowledge and experience with the next generation. Exactly. And it's not just some quick seminar either. We're talking about a rigorous 60 to 90 day program where he personally mentors these first-time buyers, walks them through the entire process from finding deals to negotiating contracts to actually operating the business. Wow. That's incredibly generous of him. So how does the partnership actually work on the financial side? They typically do a 60-40 ownership split. The first-time buyer, with Robert's guidance of course, finds a company they're passionate about and they use their skills and experience to run the business day to day. Robert's fund provides the capital for the acquisition and they take a 40% stake. So it's a true partnership. Does that side bring something valuable to the table? And what's the long-term game plan? Are they looking to actually sell the business? Absolutely. The whole idea is to grow the business together and then explore exit strategies down the line. It's a win-win for everyone involved. It's really inspiring to see someone like Robert who's not only found success in a really unconventional way, but is also so dedicated to helping others do the same. It really is. And I think the biggest takeaway here is that there are so many different paths to success in business. Robert's story reminds us to think outside the box challenge conventional wisdom and never underestimate the power of a good mentor. Well said. And for anyone listening who's feeling inspired by Robert's journey, we'll be sure to include a link to his website in the show notes. You can check out his program and see if it's the right fit for you. It's definitely worth a look. And remember, even if you're not in the market for a business acquisition, there are so many valuable lessons we can all take away from Robert's story. Absolutely. From the importance of due diligence to the power of creative deal structuring, there's a wealth of knowledge there for anyone who's looking to grow their business or their investment portfolio. Couldn't agree more. This deep dive has given us a lot to think about. It certainly has. Yeah. Until next time.
