Flip Businesses Like Real Estate: Creative Acquisition Strategies for Bigger Cash Flow | Mike Warren

Mike Warren (00:00)
real estate is amazing. Love real estate. Nothing wrong with real estate. Most of my partners in my business acquisition world come from the real estate world because they realize the same thing that I did is if I keep buying houses, I have to keep the machine moving. But if I have a business on the side,

It’s given me cash flow and all I’m doing is purely part-time effort in it and sometimes, you know, maybe no effort hardly at all. And when that happens and you’re getting the same amount of money that you would get from real estate, but you’re getting it in a business with no effort, all of a sudden that is financial and time freedom.

Michelle Kesil (02:04)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil and today I’m joined by someone I’m looking forward to chatting with, Mike Warren, who has a private equity firm focusing on business acquisitions. So really excited to have you here today, Mike.

Mike Warren (02:22)
Thank

you very much, Michelle. I’m looking forward to being here and imparting whatever strategies or knowledge I can with your listeners or viewers and whatever I can do to help.

Michelle Kesil (02:30)
Perfect, let’s dive in. First off, for those not familiar with you and your world, can you share what your main focus is?

Mike Warren (02:37)
Yeah, my main focus is on big business acquisition. So I buy, grow and sell companies. And typically I use a lot of creative real estate strategies in order to buy these companies. So a lot of times we’re buying these companies with none of our own money. We essentially the same way that you buy real estate and you do a leverage buyout on a house, meaning you get a mortgage, you get a down payment, whether it’s your money or somebody else’s and then you get the house and you make profit on it and you flip it and you keep it. Well, we do the same thing with business. So that’s kind of pretty much where we do and we can

this in any country just like you can do real estate. So the same strategies that apply in real estate apply to business acquisitions.

Michelle Kesil (03:14)
Awesome, and how did you get into that?

Mike Warren (03:16)
Actually, I started in real estate. So that’s how I actually learned all this stuff. And I transitioned from real estate into business. So I started over 30 years ago in real estate and kind of date myself here. I remember, I was dead broke. just trying to make it by and I was going to school at night and working a job and doing real estate part time. And I remember I was doing wholesaling, fixing, flipping foreclosures.

I ultimately got into apartment buildings, assisted living. So I’ve done all the different things that you can think of ⁓ regarding real estate. And I love real estate. Do not get me wrong. What I found out was all the creative strategies that I could do with real estate, I could directly apply that to business acquisition. So one of my real estate mentors back in the day, he had almost a billion dollars in real estate and this was in the 80s. So you can imagine what that’s worth today.

And he was actually telling me that that was only a small part of his overall portfolio, meaning he was buying businesses. He had multiple businesses that were making more than what he was doing on the real estate side.

And of course I was watching the movie, it’s before your time, Pretty Woman. They were just talking about where he would buy these big companies and would break them apart and he would sell them off a piece because they were worth more broken apart. Well, I go the other way. I buy companies and I piece them together and I sell them off as a bigger pie to somebody else who wants to buy the whole thing. And so I learned with my mentor’s advice and he died a couple of years after he kind of started teaching me this stuff. I learned that I could take the same

creative real estate strategies that I was using to buy property using none of my own money and I could apply it into business. And so I started buying businesses. Now I still do real estate today. Do not get me wrong. Love real estate. The difference between real estate and business is one or two zeros. And the big difference for me is that when I was doing real estate, if I bought a house or I bought an apartment building, but let’s stick with houses, right? If I bought a house and I fixed it and I turned it and I flipped it,

I made money, it was great. But if I didn’t go and get another house and keep the machine moving, all of a sudden I didn’t have money. So I found that I was doing more work keeping my machine active and running than I was in actually trying to make money. So I didn’t have time for vacations and I was trying to have a family and doing all those different things was much, much harder. And so I was trying to find ways to diversify my portfolio and I started looking at businesses with my mentor and realized, wow, a business pays me every single month.

every quarter, every year. And then if I grow that business and I sell it, I get a lump sum of cash.

Typically, you know, with several zeros on the end of it, way more than I was ever making with real estate. And I decided, okay, well, why not, you know, do my real estate kind of part-time on the side. So I shifted it down, I still do it. And I focused more on the debts on property today. That’s what I focus on a lot.

and I shifted over into buying businesses because buying businesses, it’s really not that hard once you understand the structure of how you need to do the deals. Just like in real estate, you don’t buy a property unless you know how you’re going to get out of that property. That’s rule number one, right? And your profit isn’t earned when you sell it. It’s really earned when you buy it because you have to buy it at enough of a discount to allow for whatever improvements you need to do, management, whatever, in order to get that extra profit. It’s the same thing with business.

And so we look at businesses that we want to buy the right way with the right kind of structure. And then we want to put the right teams in place, the right management, just like property management. We’ll put the right managers in place, let them run it. We want to scale that business, we want to grow it. We want to improve the business just like you would real estate. And then we get to sell it. The difference is real estate gets capped at how much can, how much growth you get. When we have businesses, there is no cap on how far and how much value you can build in by growing the business.

That’s a little bit of background for how I got into it and where I’m at today.

Michelle Kesil (07:55)
Yeah, absolutely. And what does the operational side look like when working with the businesses?

Mike Warren (08:00)
The operational side is

actually not that hard. So it really comes down into two decisions that the investor or the buyer has to decide. Do you want to be an operator? Meaning you own and operate it and you run everything and you’re in charge of all of it. Or do you want to hire somebody to run that business for you where you become essentially the chairman of the board, you oversee what’s going on, you tell them what to do and they report to you. So you have

your CEO, your president, whatever, and they report to you giving you reports on what’s happening in the business, the cash flow and stuff like that. You manage it, but it’s purely a part-time effort. An operator is a full-time effort. A CEO or chairman is a part-time effort. Me, because I want to own multiple businesses in multiple different countries, I don’t really care where it is, I care what’s the profitability and the scalability of that business. Because I want to own multiple, I can’t work in any one full-time.

because that’s a full-time job and if I then started doing another business, it’s going to distract me and I can’t do it. Either technique or either path is just fine. You have owner-operators, whether that’s HVAC, plumbing, electrical, roofing, lawn care, laundry mats, car washes, all of those things are businesses that people buy. It just depends on how much time you want to spend into it. Me, I want an operator in place.

If it’s not already in place, I want to hire them, make sure the existing

owner trains them and gets them up to speed exactly the way that I want it to be. And then I step back and I manage that business, which takes me four or five hours a week on that one business versus 40 hours a week. So essentially one-tenth the time, but I still get almost all the same profit, which is pretty good from my perspective. So operationally, you have to make one of those two decisions. Which way do you want to go?

Michelle Kesil (09:44)
Absolutely. And what are some of the obstacles or challenges that you’ve had to overcome in this role?

Mike Warren (09:51)
As an

operator, you mean as an owner or as a buyer because of two different answers? Which one?

Michelle Kesil (09:58)
Yeah, maybe one. Yeah, one from each or how you learned from each one.

Mike Warren (09:59)
Okay, sure. So let’s talk about it from

a perspective of a buyer. The biggest thing is figuring out really how you want to structure the business. The structure is everything. The business could look great and the phrase that I hate the most is when somebody says this business has unlimited potential and for the right buyer, there’s the key, the right buyer, the sky’s the limit. It’s a BS statement. It’s like somebody giving a listing on a property that’s for sale.

this amazing property and all of the scenic views and this, right? They’re all trying to sell you and they’re the fluffery, as I call it, right? They’re trying to build you up and hope that you don’t notice the underlying issues. Maybe there’s a foundation issue or something else. Well, foundation real estate, also foundation business. So if I look at a business and I want to buy it, I need to buy it the right way first. So for me, I’ll use outside finance. I’ll get banks to provide the…

majority of the loan, just like you would in real estate, I’ll get outside investors to provide my down payment. I also always require the seller to provide seller financing. Now not for the whole thing, sometimes we can do that, which case in it’s a pretty much a totally no money down deal. And most of these deals, actually all of these deals are still no money down, meaning it’s no money of my own in the deal. There may be money, but it’s from an outside investor, just like a lot of investors will do when they buy property. So when I buy it, I wanna make sure I have

seller note sometimes one or two notes from the seller providing some additional financing so that the bank loan so you got the bank loan here seller financing here and then my little small down payment here and the reason for that is that seller financing acts as an insurance plan for me in case the seller lied about something with the business you do somewhat of the same thing when you buy property in that you want to really go through and dig in and get an inspection on the property and make sure the seller of the property

Is it hiding anything from you?

When a seller tells me when I’m buying property, say, you don’t need an inspection. This house is perfect. Red flag, I absolutely want to get an inspection because they’re probably hiding something and they almost always are. So you just kind of, it’s like fool me once, shame on you. Fool me twice, shame on me. I’ve been fooled and I don’t want to do that again. Now as an operator, what I’m looking for, my biggest challenge is making sure I have the business

documented properly on who does what in the business and we understand what the roles are. Not what you might tell a lender, not what the seller says, but how does the business actually work? Once you understand how that happens, you can put the right people in the right roles. Because sometimes you have people in the business that, let’s be honest, they don’t belong in that business. They’re just coasting along, sucking the money out of the business for payroll, whatever, you know, they’re punching the clock, but they really are not motivated.

in making a business grow. And sometimes you have employees who are literally sabotaging the business on a day-to-day basis. And so I want to make sure I get the right operator who can manage this business for me. And the easiest thing that I ever found is that I give them a percentage of equity or at least profit sharing so it becomes what we call the golden handcuffs, right?

If the business does well, you make all this extra pay and you could double or triple your salary if the business does what we think it should do and what you also think it should do, then you should have unlimited income. And so we don’t cap their income, it’s based on their performance. So I’d like performance-based metrics and incentives to make these businesses grow. So does that give you an idea on both of those?

Michelle Kesil (13:57)
Yeah, absolutely. And what are you most focused on solving or scaling to next?

Mike Warren (14:02)
⁓ The most thing

I would say as a owner of a business is how do I really automate as much of the business as possible? Meaning like today, AI is very popular. So we’re using AI in all aspects of our business. Sometimes it replaces a role, but most of the time it improves the role to make it better, less mistakes, and they can do much more volume. So I want to really try to scale up business so that I can automate it.

And so when I say scale, mean, how do I grow? How do I make it grow? So the more I can automate it, the more it actually can handle more volume, meaning it can actually grow and scaling and get higher and higher. So the more I can automate it, the better off I am. And so those are the things I focus on today is, first off, making sure the business has a baseline. And every business got to have a baseline. Once we have that baseline, then we figure out, what tools, resources, techniques that I need to bring in to make this business go to the next level.

from the baseline to next level to next level to next level, because once I get up here, now I can resell that business and I can actually cash out or I could just keep it and have it be a cash cow.

Thank you.

Michelle Kesil (15:06)
Yeah, absolutely. And as someone that’s a real estate investor, what would you say are the biggest ⁓ pros of investing in the business versus real estate?

Mike Warren (15:19)
Okay, ⁓

great question. And rather than just give you a simple answer, I want to make a little bit more explanation to it, right? So real estate is amazing. Love real estate. Nothing wrong with real estate. Most of my partners in my business acquisition world come from the real estate world because they realize the same thing that I did is if I keep buying houses, I have to keep the machine moving. But if I have a business on the side,

It’s given me cash flow and all I’m doing is purely part-time effort in it and sometimes, you know, maybe no effort hardly at all. And when that happens and you’re getting the same amount of money that you would get from real estate, but you’re getting it in a business with no effort, all of a sudden that is financial and time freedom.

So investors that invest in real estate, they look at business acquisition as a way to diversify and really make it easier for them to have more cash flow to live the lifestyle that they want to have.

So they don’t have the time pressure, they don’t have the money pressure, and they can actually focus on more deals and they can pick and choose which way they want to go. So an investor that’s in real estate says, you know, hey, I’m doing great in real estate and it doesn’t matter. You could be in housing, you could be in foreclosure, you could be in tax liens, you could be in apartment buildings, you could be mobile homes, you could be whatever, self-stores. I don’t really care. When they start to look at it from a business model, all of sudden now their portfolio goes up dramatically because when you sell a business,

you’re typically selling that business for a seven or an eight figure profit. That’s a big difference compared to what you would normally do on a house, which would typically sell for a five or six figure profit. Make sense?

Michelle Kesil (16:48)
Yeah, absolutely. And what advice would you give to someone that’s wanting to shift into business acquisitions? How do they get started?

Mike Warren (16:55)
No, not probably. That’s great question.

So my advice would be, first off, figure out which role do you want to play? Do you want to be the operator or do you want to be the chairman? You got to pick, right? Could you start with one and then transition? Yes, you can. Once you figure out what role you really want to do, meaning you have your end in mind first and then allows you to kind of build into that. So once you have your end in mind, then you say, all right, what industry, what business am I actually interested in possibly buying?

What do I like? What do I know about the world? Most real estate investors have full-time jobs. They’re not full-time real estate investors, so they have a job. And when you have a business ownership, I’m not saying you quit your job and you go into business, but if you know something about the business that you’re buying, it makes it easier because then you see all the different angles that something happens to make that business run better. So I would say that the best thing is to find a business that you know something about.

And there’s literally right now in America, there’s over 2 million businesses that are currently for sale. And we have what we call this baby boomer generation that’s retiring and there’s $10 trillion in businesses that’s transitioning hands from the older generation to the younger generation, or it’s being sold or it’s literally just being shut down. The business owner would literally just hear, the business is yours, take it. You can take it for a dollar. We’ve done that, right? And because the owner doesn’t know who to sell it to.

but would like to at least keep his employees employed, but they’re ready to retire. So when you figure out which business that you want to be in, and then you look at the team, so you figure out the category first, where you want to be an operator or you want to be a chairman, then you figure out the industry you want to be in, then you look at the teams that are involved, because the more teams are already in place, the less work you have to do. So that would be my advice on helping somebody get started.

Michelle Kesil (19:20)
Are there any specific types of businesses that you’re involved in or that you recommend for first timers?

Mike Warren (19:25)
⁓ Yeah,

I’ll give you two answers. So I’m going to answer that question, but let me tell you what businesses I stay away from. And this is a matter of personal preference. So it doesn’t mean that they’re bad businesses. It just doesn’t fit my model to buy, grow and resell. So I stay away from hotels. I stay away from restaurants. I stay away from gas stations. Not that they can’t be bought and not that they can’t be sold and not that they can’t have profit from. It’s just that

I want businesses that I can literally 3X or triple the value in about two years. And I want a 3X and sell that business. So let me give you a little bit of math just so that this makes more sense. If I buy a million dollar business, I’m looking for that business to make 30 % per year in profit. That’s $300,000. That business will typically cost me three times that profit. So three times $300,000 is $900,000. So I’ll pick up that business that’s making 300 grand. I’ll buy it for $900,000.

I’ll have no money of my own into this deal. Now if I triple that business in two years, which is what we normally do, if I take that business from 300,000 and I re-exit, I take it to 900,000, and let’s just make the math easy in our heads. Let’s round that up to a million dollars. I take it from 300,000, I take it to a million. Because I’ve had this kind of growth, not this growth, right? Not flat, I’ve had rocket growth. Because I’ve had rocket growth, I can sell that business for four or five times that profit.

If my profit’s a million dollars, I can sell it for four or five million dollars when I bought it for 900,000 or one million. And that gap in between, right? I sell it for five, I pay off the one million I had ⁓ invested in it, it began with the loans and everything else, I pay that off, at least to me with a four million dollar profit in two years. It’s very hard to make that kind of profit that fast in real estate. You can, but it’s very, very much more difficult, right?

Michelle Kesil (21:14)
Thank you so much for sharing all of that.

Before we begin to wrap up here, if someone wants to reach out, connect and learn more, where can people find you?

Mike Warren (21:20)
Oh great, I appreciate that. if they’re so for

instance, one of things we do is we actually partner with our our students and our partners, meaning that we actually will put up the cash in order for their down payment to buy the business. So that’s one of things that we do. So we actually put our money behind our mouth as it were, right? We actually help them learn how to do it. So if somebody wants to learn about that, they can go to bizbuyempire.com or you can also find me on most social media at the.

T-H-E, the Mike Warren. So YouTube, Facebook, ⁓ Instagram, TikTok, it’s all the same. LinkedIn, same thing.

Michelle Kesil (21:57)
Perfect, we’ll appreciate your time and your story. Thank you for being here.

Mike Warren (21:58)
You’re very welcome, Michelle. Thank you very much. And I hope all your listeners got a lot out of it

and happy hunting.

Michelle Kesil (22:02)
Thanks so much. And for the listeners tuning in, if you got value, make sure you have subscribed. We have more conversations with operators like Mike who are building real businesses and see you on the next episode.