Table of Contents
- The Opportunity
- Finding Your Niche
- Sourcing the Deal
- Raising Capital
- Due Diligence
- Closing the Deal
“The greatest wealth transfer in the world’s history has begun.“
The greatest wealth transfer in the world’s history has begun. An estimated $70 trillion.
It’s not crypto, the stock market, or real estate.
We’re still in inning one, but word is spreading FAST!
In this guide, we’ll show you how you can get your piece of the pie.
The Great Wealth Transfer
Over the next 25 years, it’s estimated that $70 trillion will be transferred from the Baby Boomers to the next generations (Generation X and the Millennials).
Some experts have dubbed this the “Silver Tsunami” or the “Great Wealth Transfer”. Regardless of what it’s called, many see it as the opportunity of a lifetime.
12 Million Small- and Medium-Sized Businesses (SMBs)
According to some estimates, the Baby Boomers own over $10 trillion in SMBs.
Of those SMBs, approximately 70 percent (or $7 trillion worth) are expected to be sold to unrelated, third parties by 2028.
This could be you!
Your Roadmap to Business Ownership
In this guide, we’ll introduce you to the concept of entrepreneurship-through-acquisition (referred to by many as “ETA) and show you how you could become a business owner. We’ll cover each of the following topics:
Finding your niche Sourcing the deal Raising capital Conducting due diligence Closing the deal
And we’ll finish by providing you with a list of resources to help you on your way!
2 – Finding Your Niche
“You can’t hit a target if you don’t know what it is. “
Finding Your Niche
One of the most common questions I get about buying a business is, “Where do I start?”
Without the right mindset and roadmap, you could spend all of your free time combing through opportunities.
Let’s think about buying a business like we do buying a house. You would never approach a realtor and simply say, “I want a house.” You will need to lay out parameters to assist a broker in your search.
The parameters will also help you eliminate opportunities that don’t fit your criteria quickly.
It is important that your parameters align with your strengths and your desired goals. So don’t be afraid to be honest with yourself:
“What am I good at?” “What do I suck at?”
“Am I solving for lifestyle income or generational wealth?”
“Do I have the skills to perform a turnaround?”
In the HBR Guide to Buying a Small Business (which I highly recommend that you read), they mention “eternally profitable” businesses.
These are businesses that service a need that is unlikely to go away. Imagine landscaping, toilet paper manufacturing, or plumbing. Because the revenue is so sticky, the growth potential here is limited.
An alternative is a high-growth business. This could be a SaaS business. These businesses have a long runway to add revenue, but there is no guarantee that there will be any market share in 5 years.
It is important to narrow your strike zone when it comes to the industry as well. If you search around on Twitter, you will find someone working in almost every industry out there.
- Home Services
- B2B Services
- Consumer Goods
- Media Consumption Retail
- Food Services
- Warehouse Distribution
Find what fits your skillset and narrow down your search from there.
First let’s learn some business lingo: SDE. Seller’s Discretionary Earnings. Consider this the entire financial benefit to the owner of the business. It is very important when evaluating opportunities.
Generally, companies under $1,000,000 in SDE will sell for 2 to 3 times SDE. (So, if a business made $500,000 in SDE, it may sell for around $1,500,000).
As SDE increases, the selling multiple increases. Larger companies can sell for 5 to 10 times earnings.
The size of business that you want to acquire is completely dependent upon your personal net worth, your risk tolerance, and your willingness & ability to bring on capital partners.
You will learn more about deal size and structure in the section on Raising Capital.
With knowing the size, industry type, and revenue source of the business you are looking to buy, you are now equipped to engage intelligently with a broker on your search.
3- Sourcing Deal
Sourcing the Deal
So, you now know what type of business (or businesses) you’d like to own. Here comes the tricky part: where do you find one?
Your Sourcing Process
What do we mean when we say “sourcing”?
In short, it’s the act of building a process for finding a business to buy. That’s right, a process!
Below are several methods to find a business to buy.
The goal is to build a pipeline of potential deals by using a combination of these approaches.
Start with listings.
Several marketplaces exist specifically for listing businesses for sale. They include the following:
Many others! Just run a Google search & subscribe to their email updates.
You can also check traditional sources, such as craigslist and the local circulars.
Business brokers also maintain listings on their own personal websites.
You’ll want to get to know the brokers in your target geography and those that specialize in your preferred business type.
Introduce yourself, indicate you’re ready and capable of buying a business, and have a specific focus and timeline.
They may quickly become your best friends in the sourcing process!
The strategies and approaches for finding off-market deals are as varied as your imagination.
However, some common approaches may produce results:
- Cold calling
- Sending broad or targeted mailers
- Knocking on doors
A tried-and-true method is networking with local business owners and organizations and telling everyone who will listen that you’re interested in buying a business.
During this process, remember to be yourself. But also, be kind and confident!
4 – Raising Capital
“Show. Me. The. Money.“
Unless you are the kid of Mr. Monopoly, you will have to put together the financing to take down your first business.
The first thing to know when buying a business is that there are two sides to a financing equation: Debt and equity.
Equity is the amount of money either you or your partners put together to invest in a deal. And debt is the amount of money that you borrow to fund a deal. Debt will need to be paid back with interest.
There is no magic formula for how much debt or how much equity you should use for any given deal. It is entirely up to you and your risk profile. But do keep in mind that debt allows you to increase the leverage that will boost cash returns. With more debt also comes more risk. So, adjust accordingly.
Debt allows you to acquire assets that you would never have the cash to purchase by accessing loans to help facilitate the difference.
Let’s look at an example of how powerful debt can be:
Purchase Price: $1,500,000 SDE: $500,000
Purchase Multiple: 3x Financing: $1,500,000 Equity
Purchase Price: $1,500,000 SDE: $500,000
Purchase Multiple: 3x
Financing: $300,000 Equity / $1,200,000 Debt
In acquisition A, we used $1.5M in cash to buy the business. If the business makes
$500,000 is SDE, it will take 36 months to return our investment. We do not have to make debt payments in acquisition A.
In acquisition B, we used $300k cash to buy the business. We also borrowed $1.2M from the bank. If the business makes $500k in SDE, it will take about 7 months to return our initial investment of $300k. We do have to make debt payments in acquisition b, which will cut into our SDE. But we will still be paid back in less than 1 year.
The most common way to take on debt in the ETA world is through banks.
When building relationships with banks, it is important for them to know your financial situation, the goals you have with the business, and a good understanding of the business you are looking to purchase.
But a bank’s main question is always, “What is the ability of the borrower to make the payments on this loan?”
This should be at the forefront of your mind in all your conversations with banks.
Many banks work with the Small Business Administration (SBA) to help back these loans. It is an incentive by the government to help keep small businesses around the
The U.S. is afloat for generations to come.
Some SBA banks will let you borrow up to 90% of the purchase price on a loan. Meaning if the business is sold for $1M, the equity portion only needs to be 10% or
Additionally, banks sometimes like to see the former seller with some “skin in the game”. This can come in the form of a seller note.
A seller note is a loan that the seller makes directly with the buyer. Seller notes can vary, but some SBA banks allow for the seller note to equal half of the equity injected by the buyer.
So, our $1M business scenario could look like this:
- Purchase Price: $1,000,000
- SDE: $350,000
- Bank Debt: $900,000
- Seller Note: $50,000
- Buyer Equity: $50,000
Note that the more leverage you have on a business, the higher your monthly payment. It gets increasingly more difficult to pay your note if things go south. But it is an option that you should at least explore.
We alluded to equity a bit in the section above on debt, but equity is ownership in the business. Usually, that ownership is determined by cash injection.
If you do not have the equity portion needed, you do have options to partner with other investors in order to obtain that equity.
Just like debt, you can get very creative for equity. A buyer can earn additional equity through managing the acquisition process. Or simply earn equity by running the underlying business that is being purchased.
5- Due Diligence
So, you’ve got an offer accepted. Congratulations! Due diligence time is upon you.
The due diligence process is meant to answer three main questions?
What do I “know” that isn’t true? What is true that I don’t know?
Where are the biggest unknowns that cannot be answered?
The gist of due diligence comes down to those answers. It is a fact-finding mission. Not the sellers’ facts. Not the broker’s facts. And not your facts. Just the actual facts. Every minute and dollar spent in due diligence will save a ton of time and headache down the line.
We won’t attempt to walk you through all the questions you need to ask during the process but, we will give you the high-level things to look out for during the process and how to navigate that period of the transaction.
Working with the Seller
Almost all requests during this period will go through the seller. You want the seller to know upfront that you will certainly be asking tough questions during the process.
It is important to maintain a positive relationship with the seller throughout this journey. They are handing you over their legacy. They want to leave it in good hands. But ultimately, you want to make sure what they are handing over is worth having.
In due diligence, you may hear the term “hurry up and wait” more than you would ever care to. From your end, speed is everything. Time kills deals. You want to review information quickly but thoroughly.
You’ve done a ton of work to get the deal to this point. But consider all that work a sunk cost. It should not have any emotional bearing on what you find in the due diligence period.
If you are too emotionally invested, red flags turn into yellow flags and yellow flags turn into green flags. This will only hurt you in the long term.
A due diligence checklist can help to ensure you are staying on task and continuing to ask the necessary questions about the underlying business.
Customer & Team Analysis
When it comes down to it, the entirety of a business is simply, a group of customers and a team that services those customers.
Dig deep on customers.
Who they are. Why do they stay. Etc.
The customers are the lifeblood of any business. And while you can adjust the team that services the customers, the customers are not yours.
The team will be your team post-close. A company almost always resembles the owner’s values. Make sure you are not taking over a sinking ship.
A deal can die in due diligence. It is not the outcome either side wants going into the deal, but you must accept the fact that it is a potential possibility. Always stay professional and understand that dead deals are a part of the game. Red flags that can kill deals include: a misrepresentation of information, deliberate suppression of information, unwillingness to communicate, and misaligned motives.
6-Closing the Deal
“One does not leave a convivial party before closing time.”
Closing the Deal
If you have gotten this far in the book, you have a basic framework for how to buy your first business.
This is not at all a comprehensive guide but it can get the wheels turning and create the initial positive momentum for doing your first deal.
There is a $7 Trillion opportunity waiting to be tackled. The entrepreneurs with the chops to realize the opportunity and act will take the next generation of small businesses into the future.
Remember the key themes to get to close:
• Realizing the opportunity
• Finding Your Niche
• Sourcing the Deal
• Due Diligence
• Closing the Deal
I hope you have found this beginner guide useful and if you have any questions about what you read, feel free to reach us through our contact page!
Would love to hear from you!
“You don’t need to take all of the steps. Only the next one.”
Here is a list of resources to help you continue your journey:
A Twitter List by chrisxmunn
HBR Guide to Buying a Small Business by Richard S. Ruback and Royce Yudkoff Buy Then Build by Walker Deibel
The Messy Marketplace by Brent Beshore
Acquisitions Anonymous Acquiring Minds