For years, I’ve known that buying a business was a thing you could do.
And when I say “you,” I mean that in the most distant tense. Elite MBAs, venture capitalists, Wall Streeters, and bored people with too much money all fit the idea of what I thought this line of work applied to. Those who were connected, had financial backing and were raised in the world of entrepreneurship.
That’s not me. And it probably isn’t you, either.
Connecting the fact that you could buy a business and that you could buy a business took a while. But, once it took hold, it never let go. As I went down the educational rabbit hole of learning the who, what’s, and whys of buying a business, the proposition became even more attractive.
Here’s what I’ve discovered.
Here’s why and how the math of buying a business works:
Say Tom is selling his business after building it for 15 years into a pillar in the local community. He’s got a great team, customer base, reputation, and is decently profitable. Tom has worked to ensure there is no key person risk and has minimized his day-to-day role in the business while also ensuring no one customer has an oversized revenue impact.
Say, Tom’s revenue is $600k a year and his profit is $225k a year. That’s a nice little operation. Now Tom is ready to move on to something else so he needs to find a buyer, so he prices it at a fair multiple of 2.25x profit at $506.25k.
For a buyer, this is an attractive deal because it allows you to step into a business that is already known, liked, and trusted. Starting a business from scratch is tough and takes much longer and requires much more work to go from 0 to 1, so you are able to focus on optimizing and growing, rather than starting a business. In just 2–3 years, the business profits can theoretically pay for the balance of the loan.
To buy the business, buyers benefit from the SBA 9a lending program, where they can buy the company for only 10% down. In this example, the buyer inherits the business for only $60k at 10% interest. The debt payments come out to $45k, leaving $180k in profit each year, after considering the new debt service expenses. Still not bad. The ROI after year 1 is 300% of the down payment.