Market crashing? Buy a business.

Summary Points:

1. The market is headed to bear territory and the best place to invest your money is in cash-flowing assets.

2. Small businesses (older than 10 yrs.) are some of the safest and best places to invest due to their resiliency in economic downturns and performance track record.

3. How you can invest $100,000 and turn it into $6.63M in the span of 10 years

The Market

Everyone is looking at the stock market right now and seeing a lot of red.

Prediction: It still has a ways to fall.

Look at the chart below. What do you see?

The DOW is almost where it started before COVID decided to rain on its parade back in March 2020.

The question you need to ask yourself is this, “Does the market have stronger investment fundamentals now than it did back in Jan 2020 before we ever heard about COVID?”

My answer is a resounding NO.

We currently have much higher inflation, much more supply constraints, and a much tighter monetary policy in the near future with the Fed raising interest rates. All of these indicators point to a rough future for the stock market.

So what does that mean for an acquisition entrepreneur? Doesn’t that mean that all small businesses are going to decrease in revenues and suffer the same fate as the stocks that just took a nose dive?

I am confident the answer is NO.

Let me explain.

Invest in a small business

It is common knowledge that small businesses suffered in the last recession (2008-2012) and have suffered during the COVID lockdowns.

But because some small businesses failed, the remnant became that much more efficient and stronger. 

Over 60% of small business “stayed the same” or grew revenues. The other 40% decreased revenues. The 60% continue to thrive and have become amazing businesses.

The large business were “too big to fail” so they were saved by the taxpayer and still remain bloated and inefficient, only surviving on historically low interest rates (not for long).

Small businesses did not get that same luxury. The survivors, are by-and-large, good and solid companies.

When you are looking at a business to buy, it is standard procedure to get access to the last 3 years of financials. This becomes the bedrock for what the purchase price will be.

If you are looking at good, boring, profitable businesses to acquire and they show steady revenue growth the last 3 years, then chances are they will for the next 3 years.

Read last weeks article to see how high your chance of success is when buying a profitable business.

Obviously, the industry that you choose has a lot to do with it’s viability and it growth prospects, but the amazing thing about small businesses is the ability for a good owner to increase revenues without reinventing any wheel or product.

Apple and Microsoft have to constantly innovate if they want to maintain their dominance at the top of the market, spending billions on R&D and marketing.

Many times, in the land of small business, all you need to do to increase revenue is implement a cogent marketing strategy and update the website.

See the difference? Smaller is sometimes better.

Turn $100k into $6.63M in 10 years

Let’s go through an example of how investing $100,000 in a small business acquisition will build crazy wealth within 10 years.

Scenario: You buy a pest control business for $1M.The annual revenue is $1.5M.The SDE (owner profit) is $250k per year.

It is a pest control company that has been around for 10 years.It qualifies for an SBA loan and the bank requires you to put down 10% ($100k).

You close on the deal and the monthly loan payments are $9,991 per month on a 10-year note at 6%.That leaves you $10,000 a month to take a salary, find a manager or use it towards marketing and product development.

Under your ownership and your laser focus on growth, you accomplish this by increasing your digital marketing presence and implementing a software system to convert leads into sales.

The business grows at 10% per year for 10 years.

So you grow the $1.5M annual revenue to $3.89M in annual revenue.If you maintain the 16% profit margins you are now making $645,000 a year in profit.

Since it is now year 10, your loan is paid off and you are making an additional $9,991 a month.

You have worked hard and you want to sell your business to cash out and you put it on the market.Since you grew revenue by 10% for 10 years, you have a strong growth record and can get a higher multiple.

Your business is now worth $2.26M (3.5x).That's $1.26M more than you bought it.But the ROI doesn't stop there.We need to calculate all the income you generated during those 10 years as well.

Years 1-10 SDE (less debt payments) equals $4.37M.Add that to your sale price of $2.26M and you get $6.63M in pre-tax compensation!

From $100k to $6.63M in 10 years is a 52% compounded annual interest rate.Not too shabby.

This example is full of assumptions but is not rare.There are plenty of small business owners that are growing their business at 10% per year.All you need is a strategy and the know-how to execute it.Buying profitable businesses is the fastest way to grow generational wealth.

Learn more?

If you want to learn more about how to buy a business, I still have a few spots left (3) in my Buy a Business coaching cohort that is starting in a couple weeks, where I coach 10 people to get a profitable business under contract in 12 weeks.

If you are interested, fill out the application HERE and then schedule a call.

I am looking forward to connecting soon!

Ben