Buying your First Business

Business acquisition, in my opinion, is the fastest and most scalable way to create generational wealth.

While it is something that happens everyday/everywhere in this country, most entrepreneurs have no idea how to begin their acquisition journey.

I was the same way when I first started.

I fondly refer the the world of small business acquisitions (under $5M) as “The Wild West”.

There is very little sophistication in the space and it is mainly made up of mom & pop business owners selling to their competitors or handing their operations over to family.

It is precisely for this reason that there is unbelievable opportunity in this space.

Because it lacks oversight or guardrails, there is a massive opportunity to find amazing deals, and amazing fraud.

The team you build to do acquisitions is key. They are your lifeline and the better you build your team, the better your results.

This post is a little longer than usual but it is a banger. I hope you’ll forgive me.

Alright, let’s get begin.

Step 1: Start researching

Perfect place to start. Go to bizbuysell.com.

It has thousands of listings all across the country and as you look at the listings, you will start to see some patterns. You will see them mention revenue (total money coming into business) and cashflow (profit after expenses).

You will also see terms like SDE (Seller Discretionary Income=Total profit) and EBITDA (Earnings before Interest, Taxes, Depreciation and amortization) and FF&E (Furniture, Fixtures, and Equipment).

Don’t worry. These terms will have more meaning in a moment.

Now that you are on bizbuysell.com, lets do your first search for all the businesses making $10k/month of cashflow or greater.

💡 bizbuysell.com -> Search: Miami, FL / Service Businesses. Price filter = 500k to 1M -> More Filters -> cashflow =min. 120k.

Boom!

You now have all the 10k+/month cashflow businesses in your target area.

Start to see what is currently on the market and what the average price is for a business that you might like.

Step 2: Finding the business you want

You might think you are agnostic about the industry of the business you are looking to purchase. You might tell yourself “I only care about the cash-flow, not the type of business.”

This is not the best line of thinking, especially for your first acquisition.

Choose something that you understand and are interested in.

Why?

Because you are going to need to learn the ins and outs of the business you buy in order to maximize the returns.

💡 Pick something that gives you some excitement. As you grow and scale to multiple businesses you can get more diversified as you have a team that will handle most tasks.

Ways to find what you want?

Look at businesses that you routinely use.

Do you have a landscaper do your lawn?

Do you wash your clothes at a laundromat?

Did you have a pool guy?

These are all great industries that a lot of us use weekly. You know there is a need (you use it!) and if you think about the service for 10 seconds, you know there are ways to improve it.

Step 3: Determine the goal

You want a 9-5 job? Or a couple hours a week?

If you want to purchase a business and never think about it again, this is not the strategy for you. Buying a business is never completely passive.

If you are looking to leave your current W2 job and work full-time in a industry that you love. That’s great! You can still create life-changing wealth.

My preferred path is to have a GM run the business while I focus on increasing cash-flow and buying other businesses, but I know many owner-operators that love being in the day-to-day of the business.

💡 Know what you want before you start the buying process. The focus will greatly influence your chances of finding and acquiring your first business.

For those of you who want to make it as passive as possible, you’ve come to the right place.

If you do it correctly, it can be reduced to a couple hours a week. That’s my strategy.

Decide what you want.

Step 4: Start engaging with lenders

Before you even call your first seller or selling broker, you need to get your financing in order. How are you going to be paying for this acquisition?

Do you have enough cash to buy outright (least common)?

Do you need to use a bank in order to finance the purchase (most common)?

Do you only want to deal with sellers that are willing to finance a large portion themselves (best option)?

Or do you have an investor who is bringing the bulk of the capital to the deal ( other best option)?

You can use one or multiple methods to get the deal done. The beauty is that there are so many ways to get a deal done.

Even if at first contact the seller says no to seller financing, that doesn’t mean NO. It is just a starting point in the conversation.

Alright, back to the lenders.

Since most buyers are going to want/need some sort of financing it is good practice to get pre-qualified before getting too deep into the process.

Here are 4 things you need to think about when you when you start talking to lenders.

1. From the first call, the lender is sizing you up to see if you are a risky bet or a safe bet, act accordingly.

2. Make sure you come to the call with the type of business you are looking to acquire and explain WHY. It needs to make sense.

3. Come prepared with the last 3 years of tax returns and your W2 paystubs (if you have them).

4. Prepare a Personal Financial Statement that lists all of your assets and liabilities.

💡 If you come to the first meeting with these things already prepared, your lender will be pleasantly surprised and you will automatically start ahead of the other 99%.

Step 5: Start making calls

So now you have secured financing with a bank that does an SBA loan. You are prequalified and you have a letter from the bank to prove it.

Now it is time to start making calls. A lot off them.

It will take multiple offers and multiple businesses to find the right one. Do not let the search drag you down. Make as many seller Zoom meetings and phone calls as possible and take copious notes.

The more notes the better. If you don’t, all the businesses will start to blend together after the first 5 you talk to.

After 15 calls and 5 Zoom meetings you have finally found a business that checks all your boxes and it the right price and profitability.

You feel like you struck gold!

Everything about this business is perfect. You just have to have it!

WRONG!

💡 NEVER get emotionally invested when buying a business. Not once.

You need to be ready to drop the offer and walk away up until the moment it closes. If the information changes or the numbers don’t work anymore, drop it and walk away to find greener pastures.

It was really hard when I first started in acquiring businesses not to get emotionally attached.

You get to know the sellers, you see they are good people.

They want to retire and move to be with there grandkids more and they are relying on you buying the business in order to realize their dreams.

You start to feel pressured and obligated to go through with the deal. Don’t.

Know this up front and make sure not to get attached during the process. Be cordial, be respectful, but be distant and always be neutral when looking at any deal.

Back to the search.

Now you have found a good biz and have gotten their last 3 years tax returns, P&L’s and the reason they are selling. you give the business info to your SBA lender and they say the numbers check out and it is qualified to them.

That business might look like this:

Everything seems to make sense.

The seller is selling because he is retiring after running the business for 18 years and wants to buy a boat and fish all day.

Good for him.

His tax returns show that the business is making a consistent profit and has been increasing an average of 10% a year the last 3 years. His P&L’s are up to date and consistent. No crazy purchases or fluctuations to give worry.

💡 Pro tip: Give the business financials to a due diligence professional to do an QoE on.

Yes, this costs money but I promise you it is a lot cheaper than paying for an oversight after you bought the business.

Regardless of how easy it may look to read a P&L or tax return, there are many ways in which a business owner can fluff the numbers to make the business look better than it really is.

After getting the financials reviewed by a professional, it is time to make an offer.

Check out the chart below.

Based on this chart, this business usually sells between a 3 and 4 multiple.

Based on the sale price of $1,350,000, they are selling this business a little low at a 2.37 multiple.

A great place to start negotiations.

This is where buying businesses becomes really fun.

There are so many business for sale and so little buyers, you have a lot of power when negotiating to purchase a business. You might be the first person to offer on it, and it has been for sale for 6 months.

💡 Do not forget the buying power you have.

Step 6: So let’s make an offer

💡 When you look at the last 3 years, the average SDE (owner’s total profit) was $450k. This last year the business did its best at $569k but that doesn’t mean it would repeat that level of revenue.

So you take $450k and times that by a 2.34 multiple and you get $1,066,500. You round down to $1,000,000.

You make a fair offer at $1,000,000.

The seller waits a few days and comes back at $1,250,000. You wait a few days and give your best at $1,100,000.

Seller accepts. You have a business under contract at $1,100,000 at a 2.4 multiple.

Step 7: Structuring the purchase

Now that we have a price, we are going to purchase this business with NO money.

At least not our money.

We will use Bob’s money.

Bob is someone you know that is wealthy and since you have been talking about your idea to him over the last few months, he has agreed to come on as a minority equity owner.

You have agreed that if Bob gave the required 10% down for the SBA loan, he will get 15% equity.

Here is how it will go down:

You talk with your SBA lender, show them the deal, and get the business qualified for the SBA 7a program.

They need you to put 10% down to close on the deal ($110,000).

But you don't have the $110k.

Bob does.

You show Bob the deal and he likes it.

$110k down and year one (after loan costs) it will bring in $35k+ a month.

Bob put up 10% of the purchase price for 15% of the equity.

Good deal for him and great deal for you.

Here's why:

Bob gets $5,250/month in cashflow for over a 57% CoC annual return on his money.

Bob is happy.

You are even happier.

You are still cash flowing $29k a month and have room to hire a GM ($5k/month) to run daily operations.

💡 And YOU take a salary of $10k/month while leaving enough cash flow room for the business to grow ($14k/month).

You are now making $10,000 a month and you have room to hire a GM who will be running the day to day of the business.

Step 8: Due Diligence

This is the most important part of your search. You will normally have anywhere from 30-60 days (you can negotiate longer) to search through every aspect of the business and make sure it is what you thought before you buy.

You have put up $5,000 in earnest money, but with a properly written contract, you can get out if anything smells funny.

For this step you will want to bring in a due diligence professional (the same you used to check the taxes and P&Ls) and an industry professional.

You want to get a QoE (Quality of Earnings) report that truly represents the financial soundness of the business you are looking to buy.

💡 A great QoE provider I’ve found is Elliot Holland of Guardian Due Diligence. You can connect with him @elliotteholland and inquire about his services. It will be well worth your time.

For your industry professional, you need to find another lawncare business owner that you will pay to give a third party assessment of the business (there are many ways to do this, more to later newsletters).

If the seller allows, you go to the business and talk with the current employees. You see what the culture is like and if it is a thriving business or if it looks like a graveyard.

You go along for a day to see the professionalism of the employees and how they treat customers. You call in a couple times a week posing as a customer to see what the sales process looks like.

💡 IMPORTANT: Check out the businesses social media pages for anything that would harm the business. If they have horrible reviews and a bad google business profile, it could be really hard to change their reputation. Not impossible, but hard. Perception is reality.

Step 9: Develop a Post-Close Plan

Now that due diligence is finished and everything checks out.

You need to make a detailed plan about everything that will happen post-close.

Some things to plan for in first 30 days:

1. Setting up and transferring bank accounts

2. Insurance

3. Employee contracts

4. Social media account logins

5. Website control and changes

6. Email access and changing of passwords

7. Changing the lease and utilities into your name

8. Formal introduction of the new owner to your employees (important)

These are just some of the things to consider and depending on your industry, there could be a dozen more.

💡 The more that you plan, the better the transition will be.

Step 10: Exhale and close the deal

Conclusion:

This guide is meant to be a rough overview of the steps needed in order to find and close on a business that will make you at least $10k+ per month in cash flow.

There are many strategies and steps in between the 10 listed here that will greatly enhance your chances and experience of buying a cash flowing business.

To learn those high-level strategies and to have someone guide you through the process of buying a cash-flowing business, I am taking on a small number of clients to buy their first business.

Interested? Leave a comment below and we will schedule a call to go over the details.

Talk soon.