🔑 Where you can find inspiration for businesses to buy...10 ideas
Welcome to The Business Academy. Here's what we have in store for you today:
- Real-life examples of people who bought businesses & built wealth
- Learning from a deal that blew up
- Cool Deal: An Asphalt company selling for 2.5x cash flow
Something special just happened...
I've spent the last 6 months compiling every lesson I've learned buying 20+ companies into a single email course for my readers. It's full of highly tactical and practical tips on buying and investing in businesses.
The How to Buy a Business Course is now available for you to buy.
And to celebrate my loyal readers like you, the course is available for 40% off (this month only).
I have one small favor to ask in return. Your feedback is very important to me. I want to make this the best business buying resource in the world. Once you complete the course, please send me your notes and questions on how I can make it better.
Thank you
🔑 My interview with SMB deal attorney Eric Pacifici just came out...
He started a law firm with just an anonymous Twitter account a few years ago...And his team closed $950 million in SMB acquisitions last year!
In this conversation, Eric drops some incredible knowledge on hiring attorneys, negotiating acquisitions, and structuring your new business post-acquisition.
He also talks about growing his firm from nothing to 20 employees and hundreds of clients (most of which he got from his Twitter account with over 100k followers).
If you're thinking about buying a business, or are in the process of doing so, give this episode a listen.
Where I find inspiration for businesses to buy...
If you can identify a strong, established business, purchase it, and then continually improve the business' operations, you can build real wealth for yourself and your family.
Sounds easy right?
Spoiler - it's not...
But you can de-risk your journey by studying the successes and failures of other people who walked the same path. That's why I commend you for reading this newsletter. Each week you're picking up tidbits of information that add up over time to make you a smarter investor. You're learning from my mistakes, so you don't have to commit your own.
But who does Sieva learn from?
I study the famous investors of our time, I read their shareholder reports, I read their biographies...but I also study Reddit.
Reddit can be an incredible source of inspiration if you know where to look.
Here's a great post (and question I get often) I found on Reddit in the small business community:
Here are some of my favorite answers from the thread:
Notice how this writer talks about the real estate they bought. One thing I've noticed about business owners is if they have a good business, they can get pretty wealthy by owning the real estate their business uses.
There is a program called the SBA 504 which helps you buy real estate with very little money down. Then if you run your business for 10-20 years, you can pay yourself rent and pay off most of the loan balance often times making you a millionaire off the real estate alone (depending on where you live).
This writer has a good point. You need to align the owner's incentives with your goals. If you need training, make sure part of the purchase price is tied to them sticking around and helping you learn the business.
There are over 100 other replies in this Reddit thread, so I'll give you a summary of the types of businesses purchased and the most common advice.
Types of businesses mentioned:
- Restaurant franchises
- Home service franchises
- Laundromats
- Retail stores (hobby shops, bookstores)
- Car repair shops
- Manufacturing
- Custom wine cellar builder
- Lumber supplier
- Mobile dog grooming
- Car washes
- Vending machines
- Bar/restaurant (but most of the comments are negative experiences)
Most common advice:
- Include a training period for the seller in your purchase agreement
- Make sure the seller has a non compete agreement (5 years ideally)
- Hire an M&A specific attorney to review your agreement
- Use an SBA loan to finance the purchase (be careful of the personal guarantee)
- You don't need experience in the industry you're buying in, but you will need an advisor/consultant who does
- Look to pay 2-3x SDE (Seller Discretionary Earnings)
- Don't buy a restaurant!
🔑 One interesting read: a painful business buying story
While it's inspiring to learn from success stories, I've learned a lot more from my failures. Here's an interesting post about how someone failed buying a business.
I pulled out the most important paragraph & lesson for you:
I didn’t force the seller to substantiate ALL the good news in the company’s financial statements. I was mesmerized by the seller’s forecast of more good things to come. I failed to fully investigate the non-financial aspects of the business (such as the firm’s relationships with its customers, employees, creditors, suppliers, and landlord). I did not employ the best (or the safest) mix, for me, of acquisition and post-acquisition financing.
🔑 One interesting deal: A boring business - Asphalt paving and grading
$1.7m in cash flow on $8.6m in revenue.
The seller is asking for 2.5x cash flow, which is a pretty attractive valuation.
Let's dive into some of the details.
What I like
The company has been around for 15 years. I love buying companies that have been around long enough to weather some economic storms. The listing says that revenues have grown substantially in the last couple of years, though it doesn't specify by how much (our first request is to get 5 years of P&L and Balance Sheet and find-out WHY it's grown and is it sustainable).
20% net profit is a nice high-margin business. There are likely hard assets like trucks that can help you get a better loan to buy the business.
The company has 18 employees, which makes this a good size small business to acquire; anything smaller and I would be worried about key man risk, but this business may be large enough that it isn't necessarily reliant on the owner (you'll need to confirm this during diligence).
What I don't like
There aren't any glaring red flags from the listing, although there isn't a ton of info to go on. I'd be eager to talk to the listing broker and figure out how large the typical project is, who the customers are, what is the customer concentration and how dependent those customer relationships are on the current owner.
Have a great week!
Sieva
Are you going to Main Street Summit?
I’ll be speaking at Main Street Summit in Columbia, MO on October 9 & 10. It's like Coachella for business-buying nerds like me. I asked their team for a discount code for my loyal newsletter readers. If you want to come to check out the event, book your spot here.
You can use the code SIEVA2024 at checkout to get 15% off your pass.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
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