In the pursuit of financial growth and stability, the prospect of generating a substantial cash flow is an enticing endeavor. Amid the various strategies available, buying small businesses emerges as a compelling avenue, promising a swift route to attain a yearly cash flow exceeding $300k.
This approach capitalizes on the synergy of entrepreneurship and acquisition, offering a pathway that is not only efficient but also potentially lucrative. In the following guide, we unveil a comprehensive six-step process designed to guide aspiring entrepreneurs through the journey of acquiring their first business.
By following these steps, individuals can unlock the potential to secure a consistent and substantial cash flow, while simultaneously fostering their entrepreneurial spirit.
1. Start researching the market
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 SDE (Seller Discretionary Income) and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) and FF&E (Furniture, Fixtures, and Equipment).
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 $300k/year of cashflow or greater.
Search: Texas / Service Businesses. Price filter = 500k to 2M -> More Filters -> cashflow =min. $300k. Boom!
You now have all the $300k+ cash flowing 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.
2. 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)?
Do you have an investor 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.
- From the first call, the lender is sizing you up to see if you are a risky or safe bet, act accordingly.
- 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.
- Come prepared with the last 3 years of tax returns and your W2 paystubs (if you have them).
- Prepare a Personal Financial Statement that lists all of your assets and liabilities.
3: Start making calls
So now you have been pre-qualified with a bank that does SBA loans. You have a letter from the bank to prove it. Now it is time to start making calls.
It will take multiple offers and multiple businesses to find the right one. Do not let the search drag you down. Make as many 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’s the right price and profitability.
You feel like you struck gold! Everything about this business is perfect. You just have to have it! WRONG!
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.
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 9 years and wants to buy a boat and fish all day.
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 an accounting professional to do an audit 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 can between a 1.5 multiple to a 3.5 multiple. Based on the sale price of $1,500,000, they are selling this business just above the average at a 2.93 multiple.
Not outrageous and a fair 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.
4: Make an offer
When you look at the last 3 years, the average SDE (owner’s total profit) was $400k. This last year the business did its best at $511k but that doesn’t mean it would repeat that level of cash flow.
So you take $400k and times that by a 2.93 multiple and you get $1,170,000. You round down to $1,100,000. You make a fair offer at $1,100,000.
The seller waits a few days and comes back at $1,400,000. You wait a few days and give your best at $1,250,000. Seller accepts. You have a business under contract at $1,250,000 at a 2.4 multiple.
5. 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 Jim’s money.
Jim 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 Jim 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 ($125,000).
You don’t have the $125,000 or don’t want to use your money so you show Jim the deal. Jim likes it. $125k down and year one (after loan costs) it will bring in $30k+ a month.
Jim will get 15% equity and get paid $55k a year for his trouble. That’s a 44% CoC return on his money. Good deal for him and great deal for you. You are still cash flowing $25k a month and have room to hire a GM ($5k/month) to run daily operations.
6. Due Diligence
This is the most important part of your search. You will normally have anywhere from 30-45 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 put up $5,000 in earnest money, but can get out if anything smells funny. You have an accounting professional to check the numbers.
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 for a day to see the professionalism of the employees and how they treat customers.
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.
Conclusion
As we conclude this comprehensive guide, the notion that buying small businesses presents a rapid pathway to achieve a yearly cash flow exceeding $300k is both validated and illuminated.
The intricate six-step process outlined here serves as a roadmap, illuminating the way for aspiring entrepreneurs who seek not only financial prosperity but also a dynamic engagement with the world of business ownership.
With diligence, strategic thinking, and a firm grasp of the outlined steps, individuals can venture into the realm of business acquisition with confidence, potentially reaping the rewards of a steady and substantial cash flow.
This guide encapsulates the fusion of entrepreneurial ambition and strategic action, underscoring that with the right approach, the dream of financial success through small business acquisition is indeed attainable.
