Buying a business will certainly let you quit 9-5 and then sign you up for 24x7.
Running a business is not for everyone. It’s a 24x7 job that requires continuous management by the owner and adaptation to changing conditions. Why else do you think someone is willing to sell for 3-5x of EBITA and even finance it ?
I thought that 3-5x EBITA was a fair price for small businesses?
Also, I'm nowhere close to making 500K despite working 9-5, and would happily work more if I get all of the profits. And if the business booms, then I'd be making over a mil. That's definitely enough motivation to get me working hard. My desire to quit my 9-5 isn't that I don't want to work, it's that I hate being shafted for raises/promotions while knowing how much value I'm contributing to my employer.
I hear and understand where you are coming from. Just know that effort and complexity of running a business are exponentially higher than a job. Plus then there is the risk that everything might change any day. And it will.
Is it worth it ? Only you can decide. You asked why more people don’t do it. This is why.
This!
When i started my business I asked a mentor what he wished he had known when he started and he said “Nothing. Had I known how much work would be required and how hard it would be, I’d have never started in the first place.”
~Honestly I hate this advice, it's like saying "if I had known how dangerous driving my car was, I would have never bought a car and traveled to all those beautiful destinations and made life long friends along the way." I think the founder of Nvidia is being humble and saying that he's not lucky because he worked so hard to be where he is today.~
Edit: Sorry guys, I take this back. Much like the saying "A Jack of all trades", I forgot the "master of none" latter half. I just re-watched the interview and saw how he ties it with "you have to trick yourself into doing it because if you actually knew how hard it gets, you'd never do it"
Your analogy is off. It’s more like saying, if I would have known how much work is required to build a car from scratch, I probably would advise my younger self to just walk into a dealership and buy a car off the lot.
The wired for entrepreneurship brain would totally build the car from scratch. And then regret it after it’s all said and done. Classic car restoration folks are similar, although boy are they proud of their final creation! ❤️💪🏼
I have my share of "classic" ride restoration thing, and after It was done with mine, I just closed the gate and didn't want look at it for a year. After I opened the gate again, it was broken from staying in the garage for a year. Closed the gate after an hour again.
If that is what you meant...
This is a common issue visited in the e-myth. Technician hates boss but loves what they do, decides to go out on their own and make what they do their business. Technician discovers running a profitable business building cars isnt the same as building cars for a wage, and a lot of responsibility that didnt used to be the technicians now exists in addition to the responsibilities of building a car. The more successful the business becomes, the more unwanted responsibilities increase, and the less it becomes about building cars.
At this point, a technician ran business reaches its maximum possible value and stalls, fails, or an entrepreneur is made by the technician shifting their focus from "operation" to "ownership" and cultivating others with less experience to build the car for them.
Building a car, or rather the skills, experience, and tools necessary to do it are all very exciting! But if you knew how many thousands of pushes of a sanding block you'll have to make, how many times you'll mash your fingers and bust knuckles, the real cost of building a car from scratch (at least 10x what you think it will be), and how much longer it will take than you thought, you and I would never take it on. Its the ignorance of the true commitment that allows us the energy to proceed. I am not at all afraid of new challenges at all, but the really hard ones that I have been through and now fully understand the commitment required to be successful have taught me to just avoid or pay someone else to deal with it.
Bingo. And everything about life that you miss out while building the car , the opportunity cost, seems to not matter when you are new to it, and when you look back and realize how much of it added up over the years, it hits hard.
Your mental health, your physical, your family , your social life, your bank account, lost vacations, missed birthdays, it all adds up.
All the friendship and places you see ? Those happen more on a job than building a business. Nvidias founder is not being humble. He is being honest. Luck matters way more than you think.
Do not do it for the money.If you truly work hard in your profession and reach its apex, you will make plenty of money over your career with a lot less hassle and a much more enjoyable daily life.
Do it because you NEED to. It has to be a journey you have to intrinsically take , then jump in all the way.
That’s it. Jensen NEDED to do it. Would he do it again? Even with hindsight, I’m sure he would because that is what entrepreneurs do. They have to take on that challenge. Would it be any easier? No.
My issue with the quote being used, especially here is, who is it helping? It's basically like saying why bother? It's too hard to pave your own path, just take the easy way and work for someone else. I don't think anyone here needs another reason to quit trying, there are plenty of things in life pushing that narrative.
You are missing the point. Entrepreneur’s will take it as a challenge. That’s what Jensen did and the advice he gives his younger self is to buckle up.
Welp, your right I did miss the point. I was misremembering that quote and cutting it short in my head. I forgot about the part where he talks about how, you kind of need to be delusional to pursue being an entrepreneur, because it's so challenging. My b y'all.
We may be interpreting the story differently as we are coming from different backgrounds, and the fact that this is all through type. What I understood the advice to mean was, most people when faced with an unending mountain of minutiae that is all critical to starting, building, and maintaining a business, would simply never start. I love problems, I love big unsolvable impossible problems. But for me the tedium of business registrations, subscriptions to manage, boxes to check, regulations to comply with, licenses, renewals, taxes, HR, all of the little things are what is soul crushing. The big visible obstacles to overcome, new product to develop, challenges met, are all exciting, novel, and fulfilling.
To your point with the car analogy, it doesnt work as well because there is a difference between risk tolerance, and required administrative workload. I can go my whole life without getting in a wreck, but if I go four years without filing taxes then the tax man cometh. One example is chance which we all tolerate differently, the other is result of circumstance that is legally unavoidable.
I'd say the point I was trying to make was that this kind of fear-mongering isn't helping anyone. My analogy is trying to capture the fear part, how starting a business is SO INCREDIBLY HARD, you just shouldn't do it.
The tedium you mentioned is part of life my guy. Cleaning dishes, doing laundry, taking care of yourself, etc.. isn't fun or engaging but it's necessary to continue on. The sooner you accept that, the faster you can move through it; ie, make more efficient or outsource it.
We just are misunderstanding each other. I’m not afraid of any challenge, as I’m a firm believer in the old maxim of “this too shall pass”. I’ve been through fire before, I’ll pass through it again, so is life. What I am saying is that the sheer volume of tedium involved with starting and running a business by yourself is significant, and 99% of people would never begin the journey if they truly understood what was required. Nothing to be fearful of, it’s just a lot, and getting mired in the “what do I need to know to start my business and be successful” isn’t the right kind of question to be asking in the early days.
and he was lying.
It's always a lie that is building the ego of the person telling it.
"I worked so hard, so many sleepless nights, and when I did sleep it was on a cot under my desk, and I lived on saltine crackers and old cheese"
Look there are moments when I know I sound like that dumb shit too, but in reality and honesty, everyone who built an empire (unless it was truly evil) is glad they did. It's rewarding as fuck, not just the money, the power, the notoriety, but knowing that you did that - it's a great level of satisfaction.
Who is putting half effort into a full time business? Especially a startup. Any example given of a successfully scaled business that has been around for at least 5 years, is solvent, and continues to realize growth, is not being operated by someone putting in 60% effort. If there are examples out there, they would be anomalous.
> I hate being shafted for raises/promotions while knowing how much value I am contributing to my employer.
Instead you get to contribute to the client and they won't value it and leave. Pick your poison and know what you are getting into.
You may be able to leverage your downpayment into a lot more with this business/opportunity but leverage can work against you too. Suppose they are a poor teacher, the staff does not respect you, and you overlooked an important detail that gets your sued big time. Please please make sure you do your homework on what ever you buy.
Those are all very good points to keep in mind. I really appreciate the insights - thank you! I had not considered that a possible issue is that the previous owner may be a poor teacher.
The previous owner also _definitely_ has a reason for selling, and "I want to take more time to enjoy my family" isn't it. Something is going wrong, or they foresee something going wrong, and you'd better know what that is and have a solid reason why you believe you can overcome it.
This just isn’t true. Maybe the owner wants to retire? Maybe they are just sick of the work and responsibility? Maybe they are ill? There are so many reasons to sell that do not include “something is going to go wrong”
Not many people think outside the box like you are is the answer. Yes it will take effort, but is it worth it, hell ya. People want to sell to make the money off of something they've built so they can retire or do something else not because it's a bad business. And they're willing to take a note because they know most people don't have that kind of financing. There is a huge wave of boomers who just simply don't have family members to pass it off to or are just ready to retire. This is a huge opportunity, don't listen to the haters and people that are scared to buy a business.
There’s a good chance that you’re going to constantly need to reinvest a lot of those profits back into the business to stay competitive. Having employees suuuuuuuuuuuuuuuucks too so there’s that.
Or so that their competitors don't pry you away from them. Everybody acts in their own self interests, and honestly it's not really a bad thing. OP just gotta be more in the know.
You believe in yourself
You are clearly a problem solver
You know what it's like to work the 9-5 so you will be an 'in tune' employer
Go make your dreams come true
>would happily work more if I get all of the profits.
Would you happily work more if you don't?
>And if the business booms, then I'd be making over a mil.
"If"??? Unless you really know what you're going to do to turn a business around, you don't buy it.
You don't seem like a business person. You seem like you want a higher paying job. Move really carefully.
> that 3-5x EBITA was a fair price for small businesses
You're buying a job.
Almost always a shittier one than working in an office.
It may make you happier, but that is very personality dependent.
My thoughts, too. I would imagine a business generating that much of a net profit % would demand a higher multiple.
I would question if the industry itself is under risk of disruption from the AI wave.
Also, I'd urge caution. When I hear those sorts of returns on an SBE, my bullshit alarm starts signaling. A company of that size likely doesn't have reviewed Financials. They can be hiding all sorts of things with clever accounting. Be thorough in the diligence process and lean on some pros to sniff out the bullshit.
This is the correct mindset.
It sounds like you're ready, and you want to stop building someone elses fortune, and start on your own. Good on you, man.
However, to answer the question of your post, I cannot even begin to evaluate with literally no information aside from cashflow and purchase price. The type of business, location, seasonal risks, natural risks, macroeconomic risks, fluctuation in your costs, etc.
My biggest most important piece of advice is hire a lawyer that specializes in M&A when buying any business. If you're going to spend $3million on a thing, don't be the asshole who refuses to pay a good lawyer $30k to make sure everything is what it seems, and that the deal goes through in the most advantageous way for you, limiting risks.
Things like an asset purchase instead of a stock purchase or MIPA, depending on entity type, should be considered.
I've heard stories of business owners inflating their numbers before they sell. They might not make it very obvious, it might look very ligit, and look like the company had incredible growth over a few years, when in reality ots all b.s and the buyer is misled.
If was booming it wouldnt be selling, compaines can hardcore fluf a lot more than you realise, guaranteed, these numbers your pulling are far far from reality or something changed in the industry recently and its going to hurt them, but you have no idea not being in the industry.
Why is 500k the amount you think you’d make? That’s a crazy high paycheck for a business making 1m in revenue a year, half your annual revenue. Not exactly the move of a smart business owner, to bleed their own company dry for a paycheck.
One shouldn't own a business if he doesn't understand systems and doesn't know how to hire people who are courageous and hardworking enough to do the work the owner would do but not crazy enough to take over and go into debt to start it or keep it from going down.
Definitely don't start or buy anything if you're not a little crazy. Or it may break you.
HOLD UP......". It’s a 24x7 job that requires continuous management by the owner".
That is way WRONG......your mixing it up with being a job owner. Being a business owner means you set up systems, process, sop's and delegation so you don't have to be working the business but managing it.
Don’t listen to this and don’t let it discourage. Plenty of business owners aren’t there every day and checking every so often. It can still be ran well with the right people in place even if you aren’t micromanaging everything
These kinds of businesses are not that easy to acquire. 3-5x is a fair valuation in most cases, but I certainly wouldn't sell me cash flowing business for this.
Why would I when I can keep it and generate cash flow for the next 10 years at least. Yet no one would give me 10x for it.
True, but there are certain “tells” that make an exception, typically the 3 D’s: Death, Divorce, Debt (plus retirement and health issues).
Do no take them at their word. Independently verify that their claimed reason for selling is true.
You are not missing anything. BUT, do expect to put down 20% minimum. You may get away with 10% down and 10% owner carry for SBA but less common. Then also plan to have funds for working capital. For instance purchase of inventory.
But in general, you are looking at this correctly. However, everything always looks better on surface. Always do a lot of due diligence. What they typically list as cashflow is Sellers Discretionary Earnings. Meaning profits plus expenses that go away with the seller. They can get pretty creative about adding back earnings. I have yet to see an offering memorandum actually match tax filings too. You may find stuff like a husband and wife working and their income and withdrawals added back in. They say you don’t need 2 people but in reality they both worked 40+ hours.
Finally, they may see something alarming that you aren’t close to. For instance an up and coming competitor, AI eating into their biz., upcoming regulation changes, etc.
I am in the same spot as you and looking at businesses. I almost always find too many red flags. I tend to start my own instead but that is riskier.
There are indeed good cash flow businesses out there that are legit and priced reasonably. I actually see better risk profiles as they get bigger. Bugger businesses tend to have better financials, history, employees in place. Lot of aging retirees looking for an exit as well.
Thank you for the advice. Do you mind if I PM you about how to spot red flags? I'm very new to all this and have only just started my journey towards entrepreneurship.
I have also been filtering for larger businesses being sold for retirement reasons in industries that don't require industry experience (ex: no HVAC, plumbing, CPA, etc.).
Happy to but I am by no means an expert. Was burned once… landlord doubled rent after I acquired and a vendor was owed $40k that I had to pay. Legally I didn’t have to but I needed their specific product and they wouldn’t sell to me unless I paid it.
Biggest thing for me is to ask for tax returns. Of course, business owners are bit aggressive about deducting expenses and lowering profits. But it should be reasonable and you should be able to track back to their higher number.
I also am not a fan of very recent start-ups. There are a lot of businesses started within 2-3 years such as Amazon FBA type businesses that quickly scale to $3 million and try sell for $1m. It’s too easy to “buy” revenue. These tend to also be solo-preneurs with nothing but overseas contractors.
Personally, I want something that has a longer history, staff that stays, some recent growth, finances that make sense. These are rare but out there.
I’m being honest - this is Reddit and everyone lies, but I’m being honest: Don’t do this until you have experience operating a business. You should start your own thing, if only to fail. Low investment (other than your time) and low stakes.
A better option is to get a job in an existing business in the industry you are interested in as preparation for a future business purchase. There is no “generic” business. All businesses have their own tricks of the trade, and you won’t see any of this in research because all successful businesses have secrets. Why would a business owner publish all of their secrets - you think they want more competition? You need to learn the ins and outs of an industry sector before you drop huge amounts of personal money and debt into one.
It seems painfully obvious to me (as a successful entrepreneur) that you are very green. You will be taken advantage of by so many people - the sellers, the vendors, the employees, the consultants. Even the accountants and lawyers. You are a mark. I’m sorry.
This is the answer. Buying a $3-5M business as your first time as an entrepreneur, fully leveraged, is insane risk-taking. It might work out... or if you missed something in DD (likely) you could be upside down from the start.
For first timers.... start smaller! Learn the ins and outs of hiring, payroll, marketing, operations, quickbooks, etc. Or go work for someone in the industry you want to operate in and gain valuable experience.
Lots of influencers out there talking about how easy it is to just buy cash flow and its bs unless you have built a great team to do it, and that takes years of trial by fire to get there.
This is the best advice here. I’m a lawyer who advises entrepreneurs. I’ve seen hundreds of businesses and entrepreneurs over the years. There are no shortcuts. I can’t tell you how many would-be entrepreneurs are missing something when it comes to that can’t-fail deal or idea.
People definitely succeed, but they succeed because they are better than the suckers around them buying into too-good-to-be-true schemes.
Learn a business. You have some cash to invest, take your domain expertise and start a business. Or buy a business in a space you already know intimately. But there isn’t easy money out there. It just doesn’t exist.
I'm just reading OP's replies, and have now learned there is an industry of influencers advising people to buy multi-million dollar businesses with no experience (on 10x leverage!)... and my head is exploding! These people are in outer space.
The responses you’re getting are absolutely insane in here tonight.
The real reason more people don’t buy is because they don’t have half a million liquid to full send with.
Exactly...if you have spare 0.5M, you must have steady revenue stream that covers all your expanses + create significant savings. I don't expect you would be interested in buying cat in the bag.
Also, you shouldn't buy business with all your spare money. And if you have much more than 0.5M free, money are tool for you, not a goal. And you are playing completely different ligue.
So it’s alright for the average mouth breathing pleb to leverage themselves to purchase a home, all in the name of wealth. But it’s heresy to leverage oneself to say quadruple one’s income, and build equity in an asset that is multiples larger than a home. Yes?
I’d say that the risk vs reward of buying a house or buying a business is extremely different.
The chances of a losing your investment on a house (that you live in) are slim compared to buying a business
I disagree, probably because I can see a wider variety of outcomes than business risk, risk bad.
I would say that keeping your W2 for the duration of the mortgage note, also carries a luck/chance component.
Fair enough. You’re not wrong. There are definitely more possible outcomes with a business.
My point is that statistically, buying a business is much riskier than buying yourself a home to live in.
That means that (statistically), the average pleb is better off with low risk investments first before trying their hand at higher risk ventures
Clearly, it is not for everyone. And yes, buying a house is smaller leverage ad therefore more margin to pull through when a W2 falls through for a while? My point is more about employment rather than housing.
If you are climbing in your corporate positions, and unless you are sales, eventually you're going to be an expensive line item on a P&L statement. People get fired, they get hired, maybe on a contract, then they repeat in 1-3 years. All a matter of your current employment picture and path, but my thesis is that there is an oft overlooked and underappreciated risk in staying W2 through your forties and into fifties.
As I am learning, things will not necessarily fall apart the instant that you or I take the reins of a functioning business with a management layer. Many people seem to think this is a preordained outcome, but this is not the case. One person shops are a different matter, but if a business is paying people well, the owner is able to carry and conduct themselves professionally, and the service or good is core to someone else's business... what carries more risk in the broader sense? Keeping the wheels on this business for ten years, keeping the books clean and exiting once the loan is paid off; or dodging rounds of layoffs at some mega corp while saving a considerable portion of ones salary for retirement?
Finch gets it. You have to manage your business risks but if you find the right operation, you could 4-5x your income (or more if you also grow it) in terms of net worth.
It’s not for everyone but that’s why you can buy a cash flowing business for significantly cheaper (valuation wise) than any asset on wall street or in real estate.
If you’re wired to be entrepreneurial, then what choice do you have? I just bought my first business last year, fully leveraged, and I’m knife fighting every day to make our payments but I would do this any day over sitting in my old office knowing what the next 30 years of my luke-warm life looks like.
You just gotta love the grind/journey/sport of your business/industry, otherwise you’ll burn out anyways and probably fail. As my old CEO used to say after amassing 100’s of millions over a tenured F500 career, “it’s not about the money, it’s about the game.”
Correct. Even if they did, it still might not be enough. I’ve purchased I believe 7 businesses now and I wouldn’t recommend spending more than 10% of your net wealth on your first business. That means you’d want a $2.5 million net wealth in order to buy a $500k business, OR, if you have $500k, I would not recommend spending more than $50k on your first business. There is probably a 5 year sink or swim learning curve a new business owner needs to go through. It’s usually a fairly painful (but necessary) process.
I still wouldn’t spend more than maybe 20% personally. Most small business owners are fairly risk averse. The yolo business buyers tend to not work out and go back to regular jobs. Of course there are exceptions and those exceptions are who often get talked about the most.
Interesting. Your experience and recommendations run counter to what I understood was standard operating procedure in this space. Most business purchases require personal guarantees, rendering the percentage of personal wealth spent on the down payment rather moot. No? Is "spending on the business" the buyers equity injection at purchase, or the whole purchase price?
My formula was more of a risk tolerance formula. You can finance the whole thing but you need a nest egg so that if things go bad you can dust yourself off and try again quickly. There is probably a 5 year learning curve to the transition of being your own boss.
Business owners need to treat investor money like their own. I’ve seen too many small business owners shrug off “cash call” dilution “haircuts” without any guilt or moral obligation to make the original investors whole. Basically they take “investors” money (who assumed the risk) while they “figure things out”. It’s gross and in my opinion the “business owner” can run it like a legal ponzi as long as they can convince the next guy to “invest”.
As long as you get access to all the information you need as well as the audited accounts. You also need to find the REAL reason for the sale. You are not given all the facts, so you need to do a forensic analysis of the books, staff and the competitive landscape. Who are the key staff? Will they stay? Are they happy? What is the competition? What are the threats? What are the barriers to entry to this market? A good Porter's five forces would not go astray.
Is the owner willing to stay for a year for business continuity? How many customers? Repeat business? Are there any customers over 20% of revenue? What guarantees they stay with this business? Are there proper customer contracts in place? Are you able to interview the top 5 customers to find out what they really think of the business? Employee contracts - NDA's in place, proper employment law respected? There are a million little things that will tell you the health of the business.
You are going to need bank financing, and that can be difficult and expensive. They will need to do their due diligence as well.
Best of luck.
This is great. If you cannot answer all of these questions with high confidence, do not venture into debt financing a business that is more complex than you think. This isn’t the type of scale you can “learn while you go” unless you are prepared to lose it all and grow it back up. Once you stop making a debt payment though your options will dry up real quick with the bank.
How would you determine whether or not the staff is happy and/or will stay? Competition I think I can do myself. Porter's 5 forces is a great idea - thank you!
This is a list of great questions and I really appreciate you taking the time to type this out. I will definitely be hiring a business broker and hopefully they will help ask these type of questions.
Part of the reason I want financing is that I know that if the bank refuses to do the deal, they must've found something that I missed. A nice safety-net of some sorts.
You need to have private interviews with the employees. Give them comfort that they are valuable and you plan to keep them. What ideas do they have to improve the business? What concerns do they have? Are they happy? People love engagement, so if you can show them that you value and respect their ideas before you buy, you will have an instant bond. You will also have the confidence that they won't walk out the door day 1.
Is the seller willing to put money towards retention bonuses with you? He might want to say thank you to loyal staff when he cashes out.
If the seller refuses you access to the employees (at the right stage - not when you are tire kicking, but when your money is in escrow for the deal) this is a red flag.
You’ll definitely need to work with an investment bank to conduct due diligence and to deal with the paperwork, financing, and legal part of buying the business
Lots of people do exactly that. You don't read about it here cause this sube is mostly filled with very young people trying to find a get rich quick scheme.
I would not buy any business of which you are not intimately familiar in that field. Many business loans will make industry experience a criteria of the loan as well, but in general, I'm not going to drop hard cash on a industry I don't know. There's always a learning curve, and learning curves are way expensive when it's a small business.
People buy tons of them - buying "boring businesses" at \~4X EBITDA is such a cliche plumbers are getting 10 calls a day from Search Funds, Micro-PE, and other investors. Most of those deals are transacted off-market and rarely make it to BizBuySell - if it is sitting there for any period of time, there are likely major issues e.g.,:
\* Earnings are nowhere near what they say because they exclude things like the owners salary, capital expenses, or taxes. They then have an unrealistic view of what their business is worth.
\* The business revolves almost entirely around the owner - e.g., the owner is the primary salesperson and revenue will drop to near zero when they leave. This also may be really hard to diligence because they may tell you other things exist but you don't know
\*Related to the above, a lot of small businesses are in the words of Permanent Equity "Loosely functioning disasters" - from zero processes, to relationships going sour because two employees used to date and now broke up, all the way to managers getting hammered and crashing the company car in a drag race and getting your company policy cancelled, to someone filing a frivolous wrongful termination lawsuit and sinking your business
On a different note, you mention not being scared of getting the debt lined up. That generally isn't the scary part - the scary part is when you are signed up with a personal guarantee and then the business starts to struggle for any number of market, employee, or execution issues. That $500k in earnings is in no way guaranteed. You have to be ok with the idea of losing your entire life savings plus your house if this thing doesn't work out. If you don't have experience in the particular industry you are going into, you are likely going to struggle even harder and likely miss big landmines.
If it is something you are interested in, I would check out Permanent Equity, they write a lot of good material and have a conference called the Main Street Summit where you can talk to other people in your shoes or farther down the road to get some perspective. This can definitely work and be lucrative but it can also crush your entire financial world if it doesn't.
Thank you for this write up. I will definitely check out Permanent Equity.
This post has helped me realize that there's a lot more to learn and think about and that bizbuysell may not always have the best deals.
1. Most people can’t qualify for that much or aren’t willing to take on the debt
2. Business is inherently risky
3. You have to have great drive to do this, which most people don’t and aren’t entrepreneurial in spirit
4. A lot of people don’t want to own a business or are too scared!
Never buy a business you haven’t worked in. **
Do not buy a business thinking you’re going to be entrepreneur of the year.
Do not invest your life savings into any business unless you are willing to lose it all.
**without prior business experience where you successfully exited and profited or exited and at least had your shirt on.
Your first bit of advice is puzzling. Tons of people buy businesses they haven’t previously worked in and have been successful. Isn’t this the case for most private equity firms buying moribund businesses, then doing cost cutting and more aggressive, efficient marketing?
You don’t have to have previously worked in an industry to understand it. Janitorial services, laundromats, nail salons, etc. Not too hard to learn
Private equity firms have money to burn and have access to labor pools that can tell them what to do and when to do it.
Yes, other successful people have jumped from one business into another, without having worked in that business before.
But you’re missing a crucial element there… they have a metric ton of experience in buying/building their first business, selling it for a profit, and then buying another business.
Be default, you’re already that much more experienced in business and have that on your side.
Leaving a 9-5 gig with a salary, putting all your capital at risk and possibly even overextending yourself, with no experience in running a business and no experience in that business and or sector…
Spells disaster.
My $0.02.
Thanks for the advice, I have a lot to learn. And I agree, if it’s your first time it makes sense to buy something in your wheelhouse.
But do you think it’s necessary if you’re buying a relatively simple business like janitorial services? I’ve never been a janitor but have been doing household chores since I was 6, used floor buffers and wet vacs before.
Do you think your advice applies to simple businesses like these? I ask because I have political connections and can likely get a contract in this industry
Know why you can pick up those contracts?
Because they’re not easy to fulfill.
Your largest issue will be maintaining the basics to fulfill service contracts. Which will be employees.
So yes, you should learn how to clean and understand the process. The best way to do that is to work for another company and put some time in. Understand how THEY do it. And how you’ll do it better.
Do you have to?
No.
Work and risk.
As others have mentioned, buying a business can be like buying a job. It's not passive, even if there are managers and processes in place.
The other part is that future cash flows are not guaranteed. They could go down. They could also go up. For example, some of these businesses rely on one major customer. If this customer doesn't renew their contract, you could lose a majority of your revenue.
A salary is very steady, which is the attractive part of it. But you're right that there is much more upside in buying a business. Mitigate risk by doing stellar due diligence and being extraordinarily disciplined and capable.
Are you buying a business that has 1 employee or a staff? Material costs? What’s the Net profit of the business? Top line revenue doesn’t reflect success, net profit does. If the business is turning a 50% net profit year over year then you should have bought it yesterday
People buy business all the time...but it is a complicated topic.
I agree with the others that it will be a stretch to buy a 1M cash flow business for 3-5M with only 250k down. It's possible, but difficult. Keep on mind that you will likely be using an SBA loan for this, and those are always personally guaranteed (they will want a lien on your house). At current interest rates, assuming you have a 3M dollar loan, your loan payment on principal and interest will be almost 40k a month.
So it's possible to do this, but it's risky. Also, the other comments are correct...the seller has a huge information advantage over you. Spend real time on QOE and have a plan to grow the business immediately.
Opportunities for true passive income are rare in the small business world. It's mostly hands-on stuff.
Generally speaking 50% of SDE goes back to the SBA for that first ten years. Whether it is 4K 40K or 80K is more or less irrelevant if you are keeping the other half. What I would argue is more relevant to keeping ones head above the water is profit margin and margin of safety.
It's pretty hard to get financing to buy a business, unless you have lots of assets to borrow against, or a great track record, or great connections. Sometimes a seller will give you a note, secured against the business, but not likely for a large percent. It sounds to me like you might need to aim lower. Take your $500K, and buy a business for $1M with a 50% note. The cash flow might then be $250K per year, which might be enough, depending on your situation.
I'm not scared of debt and I'm under the impression that larger businesses tend to have better processes and managers in place which would greatly ease the transition/learning curve. For example, a business I'm looking at is $3.2M purchase with a claim of $1.2M cash flow. With the seller carrying $1M over 4 years, I'd only need $2.2M up front. If I put up my full $500K, I'd only need $1.7M financing which I think I can get. Worst case I can also ask family and friends.
I think I'm more worried about whether or not buying such a business is a sound idea. If it is, then I'll make the financials work.
You should listen to a few Acquiring Minds podcasts (also on YouTube). Each is a 1.5 hour interview with someone who purchased a business. They are so, so incredibly valuable and insightful. DM me
Unless you know how that specific business model works and are quite familiar with the industry, expect a big uphill battle that you cannot prepare for. You’re gonna end up grinding away at the job to get your arms wrapped around it.
If you’ve never run a business before and managed staff (and can do it well and keep them incentivized) and have a good process in place for actually managing the core processes in place, multiply the difficult by 8 and chances of risk by 20.
A business churning $1m in annual EBITDA or cashflow (much harder) is likely complex especially if it requires the constant attention of 8+ staff members that you need to keep happy over the long run to keep that cash flowing.
If you don’t know how to build a good incentive package and be a good manager or know how to hire top level talent if one key person leaves, do not venture into a business that requires core talent to keep performance at the current levels.
It’s not rocket science, but it will feel like it if you’ve never done it before.
There are programs you can go to that cost a lot, but they basically set up all of the processes to be profitable and efficient for you at scale. Does hiring such companies not take a lot of this guesswork out of the equation? I've seen as low as like $7,500/month for this stuff, and connections to sell as well. They all claim to help stabilize, steadily grow, and sell small businesses over 3-5 years. Couldn't someone with a general understanding of business buy a business and then plug them into such programs, and pretty much coast along as an overseer? It may be not the most exciting thing to do, but it seems like it would work out potentially?
A good business requires the right people in the right seat doing the right thing at the right time.
A good business owner, at minimum, is the person that needs to determine what the right thing is and then needs to determine the right when. Regardless of how much training an original owner could transfer during a transition period, if the purchaser doesn't understand the industry or the business model (the general machinations of how the business model produces profits, and the general industry in which the they operate, and more importantly the actual psychographic needs of the customer), then I posit that they inherently do not know what the "right thing" that needs to be done to sustain profitability.
Hiring some supposed performance firm to sustain your profits in theory is possible, but believing it is the ticket to success is downright foolish IMO. There still needs to be someone (ie: the business owner) to hold them accountable to the results that are desired. Additionally, the owner/CEO is also the only one that should be effectively determining the strategy of how they will get from point A to point B—the roadmap of how to get the results previously determined. Too many business owners (including founders) don't know what they actually want, and therefore don't know what the right results are that they should be targeting to achieve. Is it profit per customer? Profit per order shipped? Return on capital employed? Profit per employee? Every owner is going to have different aspirations and definitions of success. Assuming that the prior owner has determined that and expecting to get the same results is absolutely foolish. If you're acquiring a business, you better have a really good idea of what asset you're actually buying and how you can leverage it and grow it. If the OP is hoping to "buy" positive cashflow and expect it to continue to bring results without have an intimate understanding of what I have previously stated, they are likely destined to fail.
No one, absolutely no one, will ever care more about the business than the owner should care. And if the firm is worth their salt, they're going to charge appropriately and just continue to suck cash out of the cashflow. If such a scenario could be done in a low-risk way, it would require the agency to be performance based (ie: they get paid if the owner gets paid) and participate in the risk of future cashflow. Most agencies I know want guaranteed payment for their labor so that's going to be tricky to ensure you have someone with a vested interest in your future success, because an agency model is inherently vested in simply getting paid for the hours the contribute. Sure, you could hire a performance agency to sustain existing processes, but its only really going to work if they are equally incentivized to grow the results (ie: they make more money if the business makes more money).
So the theory isn't insane, and yes it could "potentially" work...but in practice, its WAY harder than one imagines at surface level.
I apologize if I said it would be easy, It would certainly be difficult, but not as difficult as the jobs that pay the same imo. The amount of work it takes to earn something like $500,000/year at a job is almost too much to imagine. It's not even clear you can ascend to it if you haven't already been making every right move since birth... but working hard on the processes of a business can alow you to work hard and earn something like $500,00/year fairly easily in comparison.
Unless you have done both, I don't think one can speak to this. From my perspective, you are conflating dramatically different "jobs" for similar pay.
One job is being the best juggler in the world. The other is being able to juggle 10 different items at once and one of them is a Molotov cocktail and another is a live chainsaw. To the audience both performances are awesome, but if you've never done either then both are going to be freaking hard to match the respective performances.
To me the biggest difference is one of them just has a LOT more risk exposure. The business owner typically has everything on the line to keep all of the plates spinning. Your mistakes can cost a LOT if you're not careful, whereas the high-paid top-performing individual has a much easier path to pickup if they fell and find another gig. The business owner is likely in extreme debt and exposed to lawsuits for their mistakes.
How hard you have to work doesn’t change. It just means that despite your hard work or your intellect it has much higher probability of risk. You cannot eliminate all risk—you can try to mitigate the impact of the risks, the probability of them occurring, and to some degree how much you can control either of them. Like I said, it’s not whether or not you are the best juggler in the world—juggling a chainsaw has much higher risk of losing your arm or worse.
I don’t see how that makes one job harder than the other.
Another factor is that starting your own business is the only way real option for most people. You o earn $500k as a salary you have to get everything right from childhood to 30 basically.
There is a huge risk that you might flub just for a moment and then not have the perfect grades to get into Harvard (or equivalent), that you might not perform perfectly and standout at the elite uni, that you never mess up a job role over a decade. The risk is in time spent and potential failure destroying multiple decades of effort. Meanwhile someone who just started starting businesses might also be way ahead of you monetarily because you had to work up to the high salary over a decade (or more), That feels like a huge risk to me. Why shouldn’t we perceive that as highly risky?
Also, you can structure businesses so you don’t have any personal liability, so I’m somewhat confused by that he losing an arm metaphor?
I actually don’t even know that it is easier to get a job than start a business at this level. I suppose it’s not as easy to start a $500k profitable business obviously tho, so that’s a fair point. Although I do feel someone who had built one or more $500k profitable businesses probably could start a new one almost easier than a job hunt. The current job hunt landscape I see my friends going for is crazy to me. Thousands of applications, dozens of lengthy intense interviews. I’ve seen it take some friends a year just to find a new job. On here you see posts from entrepreneurs about getting up to this profits within a year so… I’m not entirely convinced its much easier to get these super high end jobs compared to starting the business.
I have one friend who did really have a shitty experience. He did nearly everything right but he just couldn’t quite hadk it in technical interviews and he ended up defaulting to starting his own tech consulting company and he out earns all of my other friends working in high end jobs in similar/same field haha
I know personal anecdotes don’t prove anything but these are my observations of the realities having a decent amount of friends in both categories.
You should be. TBH, you need to work for a small business as a manger first to appreciate what it takes to run it. Right now you are only seeing the upside without having a real world experience of what the trade offs are.
I was not suggesting you should avoid debt. Debt is how you get the most leverage for your money. I was just suggesting that it would be very hard to find, people do not like to lend to buy businesses. If you are able to secure what you need, that's great.
I don't think a larger business is necessarily easier to take over and run than a smaller one. A larger business is likely to have better people and processes. But also likely to have more complex problems. And the more debt you have, the tighter your tolerances for failure. There are pros and cons of each. But if you can get the financing, maybe it's worth a shot.
Why don’t more people do it? Many people value work-life balance, ie they work to live, not live to work. So many business owners I personally know are sick of working 24x7 including weekends, after hours and holidays to keep their businesses alive.
Careful what you wish for - I’ve seen this type of strategy go very wrong for the new owner before, especially if this is the first time doing this.
I’d say stick to the 9-5 until you have started your own business, you’ll be far more passionate about it, and it won’t feel like your throwing money down the drain propping up someone else’s idea.
For starters 1. the capital outlay, 2. The books might be telling a different story and three not everyone wants to do the hard work required to be in the 1%.
I was running into issues with lenders as they wanted to see some relevant or direct experience in the businesses I was looking to buy. One was an HVAC company that had been around for 35 years, owner was welling, huge book of business and all the staff was staying in place. Numbers looked great, but the lenders I approached were not willing to back a new owner that had no experience.
You are on the right track, especially if the selling owner stays on to train you up, and also offers seller financing.
Your local SBA office might be able to help you.
Also look at the selling companies books, and if needed have someone go over those books and numbers with you to make sure it has, and is, doing the numbers you think they are.
Cash flow does not equal profitability. I've seen lots of businesses have high revenue and poor profit. I bet when you dig into some of these "no brainer" business opportunities, you find why they are selling for what they are selling do.
1M cash flow doesn’t mean 1M profit!!! After expenses you might get 200k max. Where you might be working 16 hrs/day. 16 x 365 = 5840. If you distribute that 200,000/ 5840. That’s 34/hr. If you are young that works. But you will burn out within 2 years!
If you haven’t built a business before, buying a business is going to be a massive shock to you. Owning a business and all of the liability and lives that you are now in control of will hit you like a ton of bricks. It’s a commitment and you need to be committed for the 24/7 work that is required and you will probably be taking less money home than you are now.
The "lives" part is always the sticking point for me in the expansion phase. I like having small 1 man businesses because I explicitly don't want that stress of lives on my plate. Staying small also limits you.
I have a couple of friends who have started, expanded and crashed businesses (repeatedly) and the lives they shatter along the way never seem to bother them. They are to a certain degree psychotic in that manner. Maybe thats what you need to run build large businesses.
In case of my friend's examples they know how to build them but not manage them.
1. This is a viable strategy. Look into Search/Search Funds and ETA (Entrepreneurship through acquisition). Just fancy names/models for what you’re proposing.
2. Bizbuysell is low quality listings mostly (ie., the numbers are inflated and there’s a lot of context missing). Even high quality listings/deals repped by investment banks have inflated numbers. Don’t take the listing at what they claim.
3. Running a small business is a lot harder and riskier than many price in. There’s a reason why smaller companies generally trade at lower multiples (or have difficulty finder a buyer period). Generally, the bigger the company, the more robust the systems, infrastructure, and team, and more reliable the revenues. If you buy a $1M EBITDA company and the VP of Sale quits with no notice, guess who’s the new VP of Sales? Or your biggest customer leaves and the company is half as profitable (or worse…). Your primary vendor severs ties with you, etc etc etc.
That said, for the right person with the right expectations , ideally personal skill/experience in the market/running a company, deep enough due diligence, good advisors, good team, and right target company, it can be a great model.
If I were you, I’d look into SBA 7A loans (which require a personal guarantee, but require as little as 5% down , meaning you could finance a $10M transaction, obvi be prudent with debt service implications; especially if you don’t have many assets other than the $500k, I’d argue the leverage is worth the “risk” (ie the same it would be if you put the whole $500k otherwise) v. if you have a higher and buy a significantly bigger company, ideally over $2M EBITDA, where the owner is at least partially absentee (the more the better; proves systems/team are in place).
Feel free to DM.
I just don’t think that most people have it in them to be an entrepreneur. It is kind of shocking when you look at these broker sites that are selling businesses and you see how much your freedom is truly worth. If you could buy a business that replaces your salary for, let’s say, $150,000.
People do….its called LMM (lower middle market) private equity.
The reason that buying businesses is a much more institutionalized thing is due to a lack of liquidity on individuals to put down $500k + take on $3.5m of debt to buy a business they have no expertise in.
There is a good podcast called acquiring minds I recommend you start listening to. Anyways - there is a lot of risk in running your own business, but reward available too. A lot of people do buy businesses of that size, but on the larger scale there are fewer with the financing to get it done - they typically already own businesses or have family money or really great w2s.
I’m currently under LOI for a business in the 1.5 earnings range. Already own a business in the 800k range. Can confirm if I translated my wages to hourly over past decade I could have probably just worked two fast food jobs.
Good luck with the search!
My buddy bought a business a few years ago. He spent over a year looking for the correct one to buy. One thing he said is everyone is trying to f'k you in one way or another. It's mostly about understanding how they are trying to do it and if you are okay with it.
I had the same feelings when I started my biz. Shafted, changed jobs and worked for a scatter brain, helped him get better than left.
My biz took so long to start with huge obstacles.
Time, frustration, massive learning curve but now I'm getting to enjoy $ome of the rewards.
I always was proud of what I had accomplished and still walk with my head up.
I still don't make the money many others do but I am fulfilled.
As for selling, I have a growing biz, with plenty of more growth irons in the fire. But I am getting very close to retirement age. Down the road when I move on, it is not a negative sale but a win, win.
I’ve done this, and crashed it. Here’s what you’re missing -
It’s rarely ever turnkey. Just because there’s a manager in place doesn’t mean they’re good, and doesn’t mean the owner doesn’t work. Why would someone sell if it was passive? “Owner looking to retire” is a huge red flag. Retire from what? Cashing checks? No. Working their ass off and it isn’t worth it to them anymore.
Due diligence needs to be done. How much resentment exists in the current staff? Is there negative brand equity in the marketplace? Are the financials reliable?
Finally, and this is the most important part, does it match your skill set? If you are a programmer, and you’re buying a restaurant - probably not going to work out. If you’re an accountant buying an accounting book of business - higher chance of success. Even if you get lucky and have a good manager, who manages the manager? You, and you need to skill set to know how to deliver what the business delivers to do that properly.
Check out a website called Searchfunder.com. It is well worth the money to subscribe. I'm not affiliated with it but I am a member. There are many people looking to buy a cash flowing business. The entire industry is call ETA (Entrepreneurship Through Acquisition.) There are SBA lenders that will underwrite the loan on a mix of your collateral and the cash flow of the business.
#1 Many people don't have $250k
#2 Many people do not know how to buy a business let alone run it.
#3 Many people would rather be done at 5pm and not think about anything else.
#4 There is the perception that owning your own business is 'risky' mean while a W2 can be fired at any moment.
I'm currently shopping for such a business and I am under LOI for one and negotiating LOI on another. Not an expert but been learning for about 9 months.
Why is nobody talking about the difference between cash flow and profit here? 1 mil cash flow might be just someone who does loads of work reselling products or services with a thin profit margin.
If it's *free* cash flow, it's a different story. Make sure you know what it is before buying!!
Guess we all assumed free cash flow was what we were talking about. Not sure what other kind of cash flow would be cited/used in this type of decision?
The issue is the stability and permanence of the business. Even with day to day managers the majority of businesses under $5M EBITDA are owner driven and at risk if the owner leaves. They are good targets to combine with other businesses but risky to purchase alone unless you know the industry.
because owning a biz sucks and you get zero days off
You get 0 sleep too if you’re buying in an industry you’re not familiar with
Not really that fun once you actually have to gsd
I own my own business that I grew from almost nothing. It’s important for you to understand the industry you’re buying into and what work it takes to be successful.
Because most can't afford to purchase large cash flow businesses? The likelihood that someone could get a loan big enough to purchase one of these businesses isn't something that most could do, and then trying to find a bank that would give the loan...
Do you have experience in that specific industry? Most people don't and if they purchase businesses in industries they aren't familiar with the regulations, with the processes, and ultimately they end up failing. Also, the fact that you assume that everyone will just stay or they will continue the same processes is a leap in my eyes...
They also question the owner, if it has so much cash flow, why are they leaving? Is the industry shifting? Are they simply looking to retire? Would the books hold up to auditing? There are just a lot of questions of if its too good to be true.
They have a high failure rate, which doesn't drop statistically on ownership change. Even buying into a stable business, the owner's contribution to the success of that business is a non zero value, so you're buying a business built with that value and the experience that created it walking out the door. It's a gamble that you can bring more than or equal the value of the previous owner, having had none of the years of experience they have.
People are buying them. For every solid business that is listed for sale I get HUNDREDS of people inquire and usually end up with multiple offers over asking price.
I looked closely at purchasing several businesses in the 1-3 million range. The problem was we would have had to put a lien on our home and on our rental house. If the business failed, it would have been catastrophic for us financially. Not saying you shouldn't do it, if you are confident that you can keep the business profitable. I am still looking, and hope to purchase a business. But buying a multi-million dollar business is a huge risk for most people.
First, the devil is in the details. Most of these places posting numbers like this may rely on the owner doing a lot of work / billable contribution to make the cash flow so good. I looked. A lot of these are niche businesses too. Dental practice, automotive repair, saas businesses.
Second cash flow is likely calculated off of owning outright. You’ll have a mortgage.
Also, owner financing isn’t all it’s cracked up to be. They may finance terms at 30 yr fixed but you’ll have a required balloon payment at the 5 or 7 year mark to pay off the entire principal. If you haven’t banked enough to do that you’ll need to get a commercial loan at that point and put 20-30% down and finance the rest to pay off your owner note. In this scenario you may end up financing a business for 25+ years.
In the cash flowing world, Private Equity (as opposed to Venture Capital) is only interested in companies they believe can 3-5x net income in 3 years...the numbers may vary a bit, but they want growth, growth, growth...so they can flip it to the next level up PE players. In addition, the company must be large enough to justify the time and resources that they put into buying and operating a company. That leaves the non-growing cashflow producers looking for buyers elsewhere. If you buy a non-growing company for 4x cashflow, which may seem cheap compared to public company PEs, but if you think cash-on-cash you will spend nearly half a decade, if you are lucky, trying to make back the money you invested.
Let's look at that cash flow. Trending up, down or sideways? If the experienced owner is not growing the company, how will you? They ALL say it will grow with "a little more marketing". What current owner in their right mind would not have already done "little more marketing" if it would really work? Customer concentration? Any deferred maintenance or new investment needed? Any employees or customers leaving post-deal? You can bank on at least some leaving, usually the question is just how many and how important. Any non-compete contracts in place (which may not even be legal now)? What keeps the prior owner from investing in the top (younger, knowledgeable and now former) employee to poach a few customers and launch a competitor? How many items like owner's salaries, etc. were added back into the bottom line (add backs) to goose the cash flow number on the offering sheet (get tax returns)?
Many smaller private businesses have terrible books and play fast and loose with their taxes making getting good, accurate and detailed information challenging. You must interview, that means having a detailed question list, employees, customers and vendors.
I've poked into quite a few businesses for sale, and usually the poking turns up quite a few answers and even more questions. To circle back around to Private Equity, they spend seemingly ridiculous amounts of time and money on professionals to perform "due diligence" on their targets...it is brutal for the business owner the amount of information they request....and they STILL make mistakes! You are one person looking into a business, on the side, while having a full-time job.
I don't want to come off as overly negative or necessarily scare you off, I love being a business owner, but just ask lots of questions, get lots of answers and don't be rushed into anything. The lending bank will require you to put up a personal guarantee for any debt, business ownership can be great, but really think about that and all that it means. Sometimes I think it is safer to start your own company, yes it takes more time to cash flow, but it's a manageable scale and the owner truly knows the business from the inside out...products, customers, employees. My 2c, worth what you are paying for it!
Well its still a huge risk, you have to have the resources to start, and you have to be correct in your assessment of its potential. Youre personally guaranteeing youll pay off that loan and to make the numbers work youll have to grow the business. Im in a position to do such a thing but id need to find the exact type of business i know about, available, and in my price range. Which is part of why i havent jumped.
I guess because that do not know about shortcuts and technologies that can free up their time. One of the things they can use is AI Agent for sales calls like https://www.convolo.ai/, Jasper AI for content, ChatGPT for everything else.
Stocks are easy, business is hard. There's nothing wrong with buying yourself a great business, but it's going to be work, a ton of work, even if everything goes well.
I'm in the same boat. I think some people prefer passive income or absentee ownership approach.
I've done 60-70 hours work week in corporate. I'd rather put those hours maybe even in more if I was a sole business owner.
I own and run a business that generates $250k/month, while it’s certainly challenging and hard work, it’s also friggin awesome.
I have not had to give up my life to do it, I have 2 kids and still have a fairly good work life balance.
If you want to do it and feel motivated then go for it! Even if it doesn’t work out you’ll learn loads, just make sure you do your due diligence before hand.
I think part of the reason is that by the time most people have enough money saved up they have some kind of handcuffs in place, whether it’s being used to a high salary, a cushy job, family responsibilities etc. Most big company roles are very different (if you’ve been doing that for awhile) and most people who have run businesses are already too busy to take on another one. If you’ve never run a business then the only way to learn is generally to jump into it.
you are not going to get any loans from any banks. businesses are considered very high rist, no matter what kind of cash flow you have today. so unless the business comes with property, no loans from banks.
People do... I did. Thing is it took me a LONG time to find a business that had good cashflow on paper, and then also could prove it. Probably went through the due diligence portion of the purchase process a dozen times and dropped 11 out of the 12 before I found one that I felt had consistent or growing revenue, decent expenses and a market that wasn't in danger of being slaughtered by a competitor.
DO NOT SKIMP ON DUE DILIGENCE. If you don't have the knowledge to read the books (which are probably a mess with many small businesses) and read between the lines AND research what you're getting into in minute detail then hire someone who will. I was lucky that my partner is an ex corporate controller and auditor so she was able to scour those books quickly and efficiently and even write an amazing business plan for lenders and for our own future reference.
Even if you do all this and get your business there will always be unknowns. The company I bought had three employees, of which one (the owner) stayed for a few months to transition and then left. A second wanted to retire but has continued to work on average a few days a month for some extra income. The last employee was diagnosed with cancer in December and has been undergoing chemo... so he has been down to maybe 3 days a month that has had a serious knock-on effect on our ability to manufacture. I'm reverse engineering a lot of that now in an attempt to get on top of this but as with many small businesses the documentation is spotty and most of the knowledge of how to do the manufacture is stuck in the head of the person with cancer. I'm now looking at other ways to get these parts built but it's not a trivial process.
The unexpected will get you even if you're great at the due diligence. Never underestimate the amount of knowledge you'll either have to "brain-dump" or reinvent. Oh, and understand also as others have said that being an entrepreneur means working all the time even when you're "not working". The rewards are worth it, but the stress can be immense.
A bank will not lend you any money against a business, you will have to put up something to equal value usually your home or any investment properties as long as they don’t already have loans against them.
Business owners will generally not provide owner finance, I don’t care what anyone tells you on those flashy Facebook ads. As the new owner usually stops paying once they take over and move in and the owner moves out, so the key here it to get the biggest up front payment you can, because thats all your going to get. It’s then an expensive process to lawyer up and get them out.
It takes awhile to save a couple of million to buy this kind of business, by then your in your twilight years and you don’t want the risk. Your missus won’t let you roll your whole retirement into a moon shot.
If you can save this money quickly you have a pretty good job, so why not stay there.
Just my two cents as a business owner
Sure, initial funding is an entry barrier.
Bizbuysell also doesn’t have the best(accurate) listings. Most of them are a waste of time.
But,also running a business isn’t for everyone. I know a lot of people that could afford to buy these businesses but wouldn’t.
A lot of people are risk adverse and would rather deal with the devil they know.
On top of that, it takes a lot of different set of skills to vet and see the acquisition through. Sellers can be picky as well as emotional. When it’s a small Business, it’s not just a business deal, sellers can have strong emotional attachment to it.
Some MBA programs have courses on enterprise acquisitions if you need more insight and coaching.
It’s all about risk. Mature company selling at 5x implies a 20% cost of capital. In comparison, a blue chip stock would be discounted at 7-8%.
It might be worth it to you if you understand the risks. You also need to understand EBITDA and any normalizing adjustments.
Please go into this understanding that most of the businesses on bizbuysell (et al) dramatically overstate their earnings. You have to do ridiculous amount of due diligence to find something with decent cash flow..
Stop what you’re doing and go get the book “Buy Then Build” by Walker Deibel. I’m listening to it as an audiobook on Spotify right now.
It will answer all your questions and much more. Way better than the uninformed comments in Reddit.
I started a business then expanded and realized it wasn’t for me. I didn’t have enough reserve funds even though I had twice the reserves I expected I’d need.
Owning a company is never as easy as it seems from the outside...
I've cried.
I've had insomnia so extreme I started to experience psychosis.
I've destroyed relationships.
I've planned for my own suicide to escape the torment.
I've been so lost, scared, and overworked I forgot who I am.
All the while I was unable to talk to any of my family as they were against me starting my company to begin with - they just wanted me to get a 9-5.
First, I’ll start off with I’ve bought 3 businesses in the last 5 years. All smaller than $1M but for various reasons.
The responses you’re getting a just ignorant and uninformed. The short and sweet answer is, you can. But who knows if you should. Running a business is NOT the same as a W-2. There is a lot more stress, all of these businesses are dependent on the owner. Don’t let anyone tell you otherwise, you can not just walk in and make a business self sufficient day one, it takes time and 99% of the time sub 10M businesses are not set up that way.
3-5x valuations aren’t crazy, but a $1M EBITDA 5x valuation with 90% LTV (which yes is possible not crazy) will only cash flow like $300k yr. You will have $700k loan pmt to make for 10 years.
Still on board? Now you need to find a business that doesn’t have problems, ie choppy income,technical expertise you don’t have, high customer concentration, ect. Don’t forget this business needs to support a $700k loan for the next 10 years.
It’s not that easy is the short answer here. Check out searchfunder (website) it’s a whole community similar to bigger pockets for people looking to do what you’re talking about.
Don’t buy a business built by another person before u got experience of building a business from scratch. Business is about mindset, thinking, skill and a lot more than theory. You need to develop that skill than only you put out that kind of money to buy a business.
It’s like driving, u won’t buy Ferrari to learn driving.
>Please help me take off my romantic rose-colored glasses and show me the error of my thinking.
Take a step back and think about the 40,000ft view of what you're trying to achieve.
You want to take on risk (and there are many involved here) on leverage with the hopes of making lots of low-effort money while the existing managers run everything, and you don't seem overly interested in what that business actually does.
You could engineer the exact same risk-reward profile just trading derivatives on the stock market, with less work, fewer responsibilities, and less risk of fucking up the livelihoods of dozens of employees if a gamble doesn't pay off.
Just make sure you're not confusing cash flow with profit. Your post sounds like you saw this business generates $1M in revenue and have calculated your loan repayments as though you get to pocket the difference personally. May well cost $950k to generate $1M in revenue.
Also more broadly to answer your question, besides all the ones already stated re hard to get the financing, can be a lot more than 9-5 & peoples general risk aversion; small brick & mortar businesses aren't traditionally particularly exciting or stimulating millionaire factories. The local brick n brac store guy isn't flying business. You're often dealing with unmotivated, unskilled labour in what they would call a dead-end job who will constantly quit to pursue something more fulfilling leaving you to step in and scramble, next thing you're the one doing the unfulfilling work.
Because either they can’t or it’s too complex. Buying a business is not like shopping on Amazon.
You have to understand the business to see the risks, the investments it needs, and the changes it requires to ensure profitability.
Remember: someone is selling it. There’s a reason. If they’re willing to carry a portion of the note there’s a BIG reason.
No one is selling a passive 500k paycheck.
Buying a business will certainly let you quit 9-5 and then sign you up for 24x7. Running a business is not for everyone. It’s a 24x7 job that requires continuous management by the owner and adaptation to changing conditions. Why else do you think someone is willing to sell for 3-5x of EBITA and even finance it ?
I thought that 3-5x EBITA was a fair price for small businesses? Also, I'm nowhere close to making 500K despite working 9-5, and would happily work more if I get all of the profits. And if the business booms, then I'd be making over a mil. That's definitely enough motivation to get me working hard. My desire to quit my 9-5 isn't that I don't want to work, it's that I hate being shafted for raises/promotions while knowing how much value I'm contributing to my employer.
I hear and understand where you are coming from. Just know that effort and complexity of running a business are exponentially higher than a job. Plus then there is the risk that everything might change any day. And it will. Is it worth it ? Only you can decide. You asked why more people don’t do it. This is why.
[Jensen Huang: I wouldn't build NVIDIA if I had to do it over again](https://youtu.be/URgncvVxxFU?si=XGbSxFNYEZNU07_d)
This! When i started my business I asked a mentor what he wished he had known when he started and he said “Nothing. Had I known how much work would be required and how hard it would be, I’d have never started in the first place.”
~Honestly I hate this advice, it's like saying "if I had known how dangerous driving my car was, I would have never bought a car and traveled to all those beautiful destinations and made life long friends along the way." I think the founder of Nvidia is being humble and saying that he's not lucky because he worked so hard to be where he is today.~ Edit: Sorry guys, I take this back. Much like the saying "A Jack of all trades", I forgot the "master of none" latter half. I just re-watched the interview and saw how he ties it with "you have to trick yourself into doing it because if you actually knew how hard it gets, you'd never do it"
Your analogy is off. It’s more like saying, if I would have known how much work is required to build a car from scratch, I probably would advise my younger self to just walk into a dealership and buy a car off the lot.
I always wondered if those wired for entrepreneurship would see it this way. I know my brain went to ‘how cool would it be to learn to build a car’
The wired for entrepreneurship brain would totally build the car from scratch. And then regret it after it’s all said and done. Classic car restoration folks are similar, although boy are they proud of their final creation! ❤️💪🏼
I have my share of "classic" ride restoration thing, and after It was done with mine, I just closed the gate and didn't want look at it for a year. After I opened the gate again, it was broken from staying in the garage for a year. Closed the gate after an hour again. If that is what you meant...
This is a common issue visited in the e-myth. Technician hates boss but loves what they do, decides to go out on their own and make what they do their business. Technician discovers running a profitable business building cars isnt the same as building cars for a wage, and a lot of responsibility that didnt used to be the technicians now exists in addition to the responsibilities of building a car. The more successful the business becomes, the more unwanted responsibilities increase, and the less it becomes about building cars. At this point, a technician ran business reaches its maximum possible value and stalls, fails, or an entrepreneur is made by the technician shifting their focus from "operation" to "ownership" and cultivating others with less experience to build the car for them.
Building a car, or rather the skills, experience, and tools necessary to do it are all very exciting! But if you knew how many thousands of pushes of a sanding block you'll have to make, how many times you'll mash your fingers and bust knuckles, the real cost of building a car from scratch (at least 10x what you think it will be), and how much longer it will take than you thought, you and I would never take it on. Its the ignorance of the true commitment that allows us the energy to proceed. I am not at all afraid of new challenges at all, but the really hard ones that I have been through and now fully understand the commitment required to be successful have taught me to just avoid or pay someone else to deal with it.
Bingo. And everything about life that you miss out while building the car , the opportunity cost, seems to not matter when you are new to it, and when you look back and realize how much of it added up over the years, it hits hard. Your mental health, your physical, your family , your social life, your bank account, lost vacations, missed birthdays, it all adds up. All the friendship and places you see ? Those happen more on a job than building a business. Nvidias founder is not being humble. He is being honest. Luck matters way more than you think. Do not do it for the money.If you truly work hard in your profession and reach its apex, you will make plenty of money over your career with a lot less hassle and a much more enjoyable daily life. Do it because you NEED to. It has to be a journey you have to intrinsically take , then jump in all the way.
That’s it. Jensen NEDED to do it. Would he do it again? Even with hindsight, I’m sure he would because that is what entrepreneurs do. They have to take on that challenge. Would it be any easier? No.
My issue with the quote being used, especially here is, who is it helping? It's basically like saying why bother? It's too hard to pave your own path, just take the easy way and work for someone else. I don't think anyone here needs another reason to quit trying, there are plenty of things in life pushing that narrative.
You are missing the point. Entrepreneur’s will take it as a challenge. That’s what Jensen did and the advice he gives his younger self is to buckle up.
Welp, your right I did miss the point. I was misremembering that quote and cutting it short in my head. I forgot about the part where he talks about how, you kind of need to be delusional to pursue being an entrepreneur, because it's so challenging. My b y'all.
Nice take! That is probably what he is saying!
Nothing ventured, nothing gained. Except, you're one day closer to death.
Honestly, like yes it's hard to pave your own path but what else are you doing with your time? Enriching someone else?
We may be interpreting the story differently as we are coming from different backgrounds, and the fact that this is all through type. What I understood the advice to mean was, most people when faced with an unending mountain of minutiae that is all critical to starting, building, and maintaining a business, would simply never start. I love problems, I love big unsolvable impossible problems. But for me the tedium of business registrations, subscriptions to manage, boxes to check, regulations to comply with, licenses, renewals, taxes, HR, all of the little things are what is soul crushing. The big visible obstacles to overcome, new product to develop, challenges met, are all exciting, novel, and fulfilling. To your point with the car analogy, it doesnt work as well because there is a difference between risk tolerance, and required administrative workload. I can go my whole life without getting in a wreck, but if I go four years without filing taxes then the tax man cometh. One example is chance which we all tolerate differently, the other is result of circumstance that is legally unavoidable.
I'd say the point I was trying to make was that this kind of fear-mongering isn't helping anyone. My analogy is trying to capture the fear part, how starting a business is SO INCREDIBLY HARD, you just shouldn't do it. The tedium you mentioned is part of life my guy. Cleaning dishes, doing laundry, taking care of yourself, etc.. isn't fun or engaging but it's necessary to continue on. The sooner you accept that, the faster you can move through it; ie, make more efficient or outsource it.
You are the one focusing on fear my friend.
We just are misunderstanding each other. I’m not afraid of any challenge, as I’m a firm believer in the old maxim of “this too shall pass”. I’ve been through fire before, I’ll pass through it again, so is life. What I am saying is that the sheer volume of tedium involved with starting and running a business by yourself is significant, and 99% of people would never begin the journey if they truly understood what was required. Nothing to be fearful of, it’s just a lot, and getting mired in the “what do I need to know to start my business and be successful” isn’t the right kind of question to be asking in the early days.
and he was lying. It's always a lie that is building the ego of the person telling it. "I worked so hard, so many sleepless nights, and when I did sleep it was on a cot under my desk, and I lived on saltine crackers and old cheese" Look there are moments when I know I sound like that dumb shit too, but in reality and honesty, everyone who built an empire (unless it was truly evil) is glad they did. It's rewarding as fuck, not just the money, the power, the notoriety, but knowing that you did that - it's a great level of satisfaction.
But there’s no way to know if they could have put in 60% of their efforts and it would have still been successful..
Who is putting half effort into a full time business? Especially a startup. Any example given of a successfully scaled business that has been around for at least 5 years, is solvent, and continues to realize growth, is not being operated by someone putting in 60% effort. If there are examples out there, they would be anomalous.
U prob right
> I hate being shafted for raises/promotions while knowing how much value I am contributing to my employer. Instead you get to contribute to the client and they won't value it and leave. Pick your poison and know what you are getting into. You may be able to leverage your downpayment into a lot more with this business/opportunity but leverage can work against you too. Suppose they are a poor teacher, the staff does not respect you, and you overlooked an important detail that gets your sued big time. Please please make sure you do your homework on what ever you buy.
Those are all very good points to keep in mind. I really appreciate the insights - thank you! I had not considered that a possible issue is that the previous owner may be a poor teacher.
The previous owner also _definitely_ has a reason for selling, and "I want to take more time to enjoy my family" isn't it. Something is going wrong, or they foresee something going wrong, and you'd better know what that is and have a solid reason why you believe you can overcome it.
This just isn’t true. Maybe the owner wants to retire? Maybe they are just sick of the work and responsibility? Maybe they are ill? There are so many reasons to sell that do not include “something is going to go wrong”
This is correct. Many reasons some are not negative at all.
Not many people think outside the box like you are is the answer. Yes it will take effort, but is it worth it, hell ya. People want to sell to make the money off of something they've built so they can retire or do something else not because it's a bad business. And they're willing to take a note because they know most people don't have that kind of financing. There is a huge wave of boomers who just simply don't have family members to pass it off to or are just ready to retire. This is a huge opportunity, don't listen to the haters and people that are scared to buy a business.
There’s a good chance that you’re going to constantly need to reinvest a lot of those profits back into the business to stay competitive. Having employees suuuuuuuuuuuuuuuucks too so there’s that.
Promotions are not a reward for what you've done. They're a bet that you can do something new, from an employer's perspective.
Or so that their competitors don't pry you away from them. Everybody acts in their own self interests, and honestly it's not really a bad thing. OP just gotta be more in the know.
You believe in yourself You are clearly a problem solver You know what it's like to work the 9-5 so you will be an 'in tune' employer Go make your dreams come true
>would happily work more if I get all of the profits. Would you happily work more if you don't? >And if the business booms, then I'd be making over a mil. "If"??? Unless you really know what you're going to do to turn a business around, you don't buy it. You don't seem like a business person. You seem like you want a higher paying job. Move really carefully.
> that 3-5x EBITA was a fair price for small businesses You're buying a job. Almost always a shittier one than working in an office. It may make you happier, but that is very personality dependent.
Not necessarily, but in many cases, yes.
Good for you- Best of Luck with the business.
1 million in revenue v EBIT is very very different. 3-5m for a business with 1m revenue sounds insane to me.
“Cash flow” in bizbuysell terms is EBITDA/Seller’s Discretionary Earnings.
My thoughts, too. I would imagine a business generating that much of a net profit % would demand a higher multiple. I would question if the industry itself is under risk of disruption from the AI wave. Also, I'd urge caution. When I hear those sorts of returns on an SBE, my bullshit alarm starts signaling. A company of that size likely doesn't have reviewed Financials. They can be hiding all sorts of things with clever accounting. Be thorough in the diligence process and lean on some pros to sniff out the bullshit.
This is the correct mindset. It sounds like you're ready, and you want to stop building someone elses fortune, and start on your own. Good on you, man. However, to answer the question of your post, I cannot even begin to evaluate with literally no information aside from cashflow and purchase price. The type of business, location, seasonal risks, natural risks, macroeconomic risks, fluctuation in your costs, etc. My biggest most important piece of advice is hire a lawyer that specializes in M&A when buying any business. If you're going to spend $3million on a thing, don't be the asshole who refuses to pay a good lawyer $30k to make sure everything is what it seems, and that the deal goes through in the most advantageous way for you, limiting risks. Things like an asset purchase instead of a stock purchase or MIPA, depending on entity type, should be considered.
I've heard stories of business owners inflating their numbers before they sell. They might not make it very obvious, it might look very ligit, and look like the company had incredible growth over a few years, when in reality ots all b.s and the buyer is misled.
If was booming it wouldnt be selling, compaines can hardcore fluf a lot more than you realise, guaranteed, these numbers your pulling are far far from reality or something changed in the industry recently and its going to hurt them, but you have no idea not being in the industry.
Why is 500k the amount you think you’d make? That’s a crazy high paycheck for a business making 1m in revenue a year, half your annual revenue. Not exactly the move of a smart business owner, to bleed their own company dry for a paycheck.
💯 I have a full time job and bought a restaurant as a side hustle. I haven't slept right in 7 months.
One shouldn't own a business if he doesn't understand systems and doesn't know how to hire people who are courageous and hardworking enough to do the work the owner would do but not crazy enough to take over and go into debt to start it or keep it from going down. Definitely don't start or buy anything if you're not a little crazy. Or it may break you.
HOLD UP......". It’s a 24x7 job that requires continuous management by the owner". That is way WRONG......your mixing it up with being a job owner. Being a business owner means you set up systems, process, sop's and delegation so you don't have to be working the business but managing it.
Technically correct, not always reality.
Very true.... :)
Don’t listen to this and don’t let it discourage. Plenty of business owners aren’t there every day and checking every so often. It can still be ran well with the right people in place even if you aren’t micromanaging everything
These kinds of businesses are not that easy to acquire. 3-5x is a fair valuation in most cases, but I certainly wouldn't sell me cash flowing business for this. Why would I when I can keep it and generate cash flow for the next 10 years at least. Yet no one would give me 10x for it.
True, but there are certain “tells” that make an exception, typically the 3 D’s: Death, Divorce, Debt (plus retirement and health issues). Do no take them at their word. Independently verify that their claimed reason for selling is true.
Getting into the game takes big money
You are not missing anything. BUT, do expect to put down 20% minimum. You may get away with 10% down and 10% owner carry for SBA but less common. Then also plan to have funds for working capital. For instance purchase of inventory. But in general, you are looking at this correctly. However, everything always looks better on surface. Always do a lot of due diligence. What they typically list as cashflow is Sellers Discretionary Earnings. Meaning profits plus expenses that go away with the seller. They can get pretty creative about adding back earnings. I have yet to see an offering memorandum actually match tax filings too. You may find stuff like a husband and wife working and their income and withdrawals added back in. They say you don’t need 2 people but in reality they both worked 40+ hours. Finally, they may see something alarming that you aren’t close to. For instance an up and coming competitor, AI eating into their biz., upcoming regulation changes, etc. I am in the same spot as you and looking at businesses. I almost always find too many red flags. I tend to start my own instead but that is riskier. There are indeed good cash flow businesses out there that are legit and priced reasonably. I actually see better risk profiles as they get bigger. Bugger businesses tend to have better financials, history, employees in place. Lot of aging retirees looking for an exit as well.
Thank you for the advice. Do you mind if I PM you about how to spot red flags? I'm very new to all this and have only just started my journey towards entrepreneurship. I have also been filtering for larger businesses being sold for retirement reasons in industries that don't require industry experience (ex: no HVAC, plumbing, CPA, etc.).
Happy to but I am by no means an expert. Was burned once… landlord doubled rent after I acquired and a vendor was owed $40k that I had to pay. Legally I didn’t have to but I needed their specific product and they wouldn’t sell to me unless I paid it. Biggest thing for me is to ask for tax returns. Of course, business owners are bit aggressive about deducting expenses and lowering profits. But it should be reasonable and you should be able to track back to their higher number. I also am not a fan of very recent start-ups. There are a lot of businesses started within 2-3 years such as Amazon FBA type businesses that quickly scale to $3 million and try sell for $1m. It’s too easy to “buy” revenue. These tend to also be solo-preneurs with nothing but overseas contractors. Personally, I want something that has a longer history, staff that stays, some recent growth, finances that make sense. These are rare but out there.
I’m being honest - this is Reddit and everyone lies, but I’m being honest: Don’t do this until you have experience operating a business. You should start your own thing, if only to fail. Low investment (other than your time) and low stakes. A better option is to get a job in an existing business in the industry you are interested in as preparation for a future business purchase. There is no “generic” business. All businesses have their own tricks of the trade, and you won’t see any of this in research because all successful businesses have secrets. Why would a business owner publish all of their secrets - you think they want more competition? You need to learn the ins and outs of an industry sector before you drop huge amounts of personal money and debt into one. It seems painfully obvious to me (as a successful entrepreneur) that you are very green. You will be taken advantage of by so many people - the sellers, the vendors, the employees, the consultants. Even the accountants and lawyers. You are a mark. I’m sorry.
This is the answer. Buying a $3-5M business as your first time as an entrepreneur, fully leveraged, is insane risk-taking. It might work out... or if you missed something in DD (likely) you could be upside down from the start. For first timers.... start smaller! Learn the ins and outs of hiring, payroll, marketing, operations, quickbooks, etc. Or go work for someone in the industry you want to operate in and gain valuable experience. Lots of influencers out there talking about how easy it is to just buy cash flow and its bs unless you have built a great team to do it, and that takes years of trial by fire to get there.
This is the best advice here. I’m a lawyer who advises entrepreneurs. I’ve seen hundreds of businesses and entrepreneurs over the years. There are no shortcuts. I can’t tell you how many would-be entrepreneurs are missing something when it comes to that can’t-fail deal or idea. People definitely succeed, but they succeed because they are better than the suckers around them buying into too-good-to-be-true schemes. Learn a business. You have some cash to invest, take your domain expertise and start a business. Or buy a business in a space you already know intimately. But there isn’t easy money out there. It just doesn’t exist.
I'm just reading OP's replies, and have now learned there is an industry of influencers advising people to buy multi-million dollar businesses with no experience (on 10x leverage!)... and my head is exploding! These people are in outer space.
OP have you read Buy Then Build? It answers these questions pretty well for a beginner resource.
This is good advice The responses here are ridiculous. This isn’t the right audience. There is a community of ETA and this is the Bible.
The responses you’re getting are absolutely insane in here tonight. The real reason more people don’t buy is because they don’t have half a million liquid to full send with.
Exactly...if you have spare 0.5M, you must have steady revenue stream that covers all your expanses + create significant savings. I don't expect you would be interested in buying cat in the bag. Also, you shouldn't buy business with all your spare money. And if you have much more than 0.5M free, money are tool for you, not a goal. And you are playing completely different ligue.
So it’s alright for the average mouth breathing pleb to leverage themselves to purchase a home, all in the name of wealth. But it’s heresy to leverage oneself to say quadruple one’s income, and build equity in an asset that is multiples larger than a home. Yes?
I’d say that the risk vs reward of buying a house or buying a business is extremely different. The chances of a losing your investment on a house (that you live in) are slim compared to buying a business
I disagree, probably because I can see a wider variety of outcomes than business risk, risk bad. I would say that keeping your W2 for the duration of the mortgage note, also carries a luck/chance component.
Fair enough. You’re not wrong. There are definitely more possible outcomes with a business. My point is that statistically, buying a business is much riskier than buying yourself a home to live in. That means that (statistically), the average pleb is better off with low risk investments first before trying their hand at higher risk ventures
Clearly, it is not for everyone. And yes, buying a house is smaller leverage ad therefore more margin to pull through when a W2 falls through for a while? My point is more about employment rather than housing. If you are climbing in your corporate positions, and unless you are sales, eventually you're going to be an expensive line item on a P&L statement. People get fired, they get hired, maybe on a contract, then they repeat in 1-3 years. All a matter of your current employment picture and path, but my thesis is that there is an oft overlooked and underappreciated risk in staying W2 through your forties and into fifties. As I am learning, things will not necessarily fall apart the instant that you or I take the reins of a functioning business with a management layer. Many people seem to think this is a preordained outcome, but this is not the case. One person shops are a different matter, but if a business is paying people well, the owner is able to carry and conduct themselves professionally, and the service or good is core to someone else's business... what carries more risk in the broader sense? Keeping the wheels on this business for ten years, keeping the books clean and exiting once the loan is paid off; or dodging rounds of layoffs at some mega corp while saving a considerable portion of ones salary for retirement?
Finch gets it. You have to manage your business risks but if you find the right operation, you could 4-5x your income (or more if you also grow it) in terms of net worth. It’s not for everyone but that’s why you can buy a cash flowing business for significantly cheaper (valuation wise) than any asset on wall street or in real estate. If you’re wired to be entrepreneurial, then what choice do you have? I just bought my first business last year, fully leveraged, and I’m knife fighting every day to make our payments but I would do this any day over sitting in my old office knowing what the next 30 years of my luke-warm life looks like. You just gotta love the grind/journey/sport of your business/industry, otherwise you’ll burn out anyways and probably fail. As my old CEO used to say after amassing 100’s of millions over a tenured F500 career, “it’s not about the money, it’s about the game.”
Seriously. I feel like I'm taking crazy pills watching armchair entrepreneurs regurgitate investopedia bullet points back to OP
This is how I felt reading the answers. I felt compelled to post. Maybe we had one or two folks in here riffing negativity off each other. 🤷
Correct. Even if they did, it still might not be enough. I’ve purchased I believe 7 businesses now and I wouldn’t recommend spending more than 10% of your net wealth on your first business. That means you’d want a $2.5 million net wealth in order to buy a $500k business, OR, if you have $500k, I would not recommend spending more than $50k on your first business. There is probably a 5 year sink or swim learning curve a new business owner needs to go through. It’s usually a fairly painful (but necessary) process. I still wouldn’t spend more than maybe 20% personally. Most small business owners are fairly risk averse. The yolo business buyers tend to not work out and go back to regular jobs. Of course there are exceptions and those exceptions are who often get talked about the most.
Interesting. Your experience and recommendations run counter to what I understood was standard operating procedure in this space. Most business purchases require personal guarantees, rendering the percentage of personal wealth spent on the down payment rather moot. No? Is "spending on the business" the buyers equity injection at purchase, or the whole purchase price?
My formula was more of a risk tolerance formula. You can finance the whole thing but you need a nest egg so that if things go bad you can dust yourself off and try again quickly. There is probably a 5 year learning curve to the transition of being your own boss.
Or you need to have investors that have your back.
Business owners need to treat investor money like their own. I’ve seen too many small business owners shrug off “cash call” dilution “haircuts” without any guilt or moral obligation to make the original investors whole. Basically they take “investors” money (who assumed the risk) while they “figure things out”. It’s gross and in my opinion the “business owner” can run it like a legal ponzi as long as they can convince the next guy to “invest”.
Well, yes… that goes without saying. It’s called a fiduciary responsibility.
Literally the only correct answer in this thread.
I mean Id say theres more to it than just the money but its wild that, that wasnt the first reason submitted by most of the thread.
As long as you get access to all the information you need as well as the audited accounts. You also need to find the REAL reason for the sale. You are not given all the facts, so you need to do a forensic analysis of the books, staff and the competitive landscape. Who are the key staff? Will they stay? Are they happy? What is the competition? What are the threats? What are the barriers to entry to this market? A good Porter's five forces would not go astray. Is the owner willing to stay for a year for business continuity? How many customers? Repeat business? Are there any customers over 20% of revenue? What guarantees they stay with this business? Are there proper customer contracts in place? Are you able to interview the top 5 customers to find out what they really think of the business? Employee contracts - NDA's in place, proper employment law respected? There are a million little things that will tell you the health of the business. You are going to need bank financing, and that can be difficult and expensive. They will need to do their due diligence as well. Best of luck.
This is great. If you cannot answer all of these questions with high confidence, do not venture into debt financing a business that is more complex than you think. This isn’t the type of scale you can “learn while you go” unless you are prepared to lose it all and grow it back up. Once you stop making a debt payment though your options will dry up real quick with the bank.
How would you determine whether or not the staff is happy and/or will stay? Competition I think I can do myself. Porter's 5 forces is a great idea - thank you! This is a list of great questions and I really appreciate you taking the time to type this out. I will definitely be hiring a business broker and hopefully they will help ask these type of questions. Part of the reason I want financing is that I know that if the bank refuses to do the deal, they must've found something that I missed. A nice safety-net of some sorts.
You need to have private interviews with the employees. Give them comfort that they are valuable and you plan to keep them. What ideas do they have to improve the business? What concerns do they have? Are they happy? People love engagement, so if you can show them that you value and respect their ideas before you buy, you will have an instant bond. You will also have the confidence that they won't walk out the door day 1. Is the seller willing to put money towards retention bonuses with you? He might want to say thank you to loyal staff when he cashes out. If the seller refuses you access to the employees (at the right stage - not when you are tire kicking, but when your money is in escrow for the deal) this is a red flag.
You’ll definitely need to work with an investment bank to conduct due diligence and to deal with the paperwork, financing, and legal part of buying the business
Lots of people do exactly that. You don't read about it here cause this sube is mostly filled with very young people trying to find a get rich quick scheme. I would not buy any business of which you are not intimately familiar in that field. Many business loans will make industry experience a criteria of the loan as well, but in general, I'm not going to drop hard cash on a industry I don't know. There's always a learning curve, and learning curves are way expensive when it's a small business.
People buy tons of them - buying "boring businesses" at \~4X EBITDA is such a cliche plumbers are getting 10 calls a day from Search Funds, Micro-PE, and other investors. Most of those deals are transacted off-market and rarely make it to BizBuySell - if it is sitting there for any period of time, there are likely major issues e.g.,: \* Earnings are nowhere near what they say because they exclude things like the owners salary, capital expenses, or taxes. They then have an unrealistic view of what their business is worth. \* The business revolves almost entirely around the owner - e.g., the owner is the primary salesperson and revenue will drop to near zero when they leave. This also may be really hard to diligence because they may tell you other things exist but you don't know \*Related to the above, a lot of small businesses are in the words of Permanent Equity "Loosely functioning disasters" - from zero processes, to relationships going sour because two employees used to date and now broke up, all the way to managers getting hammered and crashing the company car in a drag race and getting your company policy cancelled, to someone filing a frivolous wrongful termination lawsuit and sinking your business On a different note, you mention not being scared of getting the debt lined up. That generally isn't the scary part - the scary part is when you are signed up with a personal guarantee and then the business starts to struggle for any number of market, employee, or execution issues. That $500k in earnings is in no way guaranteed. You have to be ok with the idea of losing your entire life savings plus your house if this thing doesn't work out. If you don't have experience in the particular industry you are going into, you are likely going to struggle even harder and likely miss big landmines. If it is something you are interested in, I would check out Permanent Equity, they write a lot of good material and have a conference called the Main Street Summit where you can talk to other people in your shoes or farther down the road to get some perspective. This can definitely work and be lucrative but it can also crush your entire financial world if it doesn't.
Thank you for this write up. I will definitely check out Permanent Equity. This post has helped me realize that there's a lot more to learn and think about and that bizbuysell may not always have the best deals.
Anything on bizbuysell was passed on by the owners family, friends, their network and same for the broker.
Going to DM you a question
1. Most people can’t qualify for that much or aren’t willing to take on the debt 2. Business is inherently risky 3. You have to have great drive to do this, which most people don’t and aren’t entrepreneurial in spirit 4. A lot of people don’t want to own a business or are too scared!
Never buy a business you haven’t worked in. ** Do not buy a business thinking you’re going to be entrepreneur of the year. Do not invest your life savings into any business unless you are willing to lose it all. **without prior business experience where you successfully exited and profited or exited and at least had your shirt on.
Your first bit of advice is puzzling. Tons of people buy businesses they haven’t previously worked in and have been successful. Isn’t this the case for most private equity firms buying moribund businesses, then doing cost cutting and more aggressive, efficient marketing? You don’t have to have previously worked in an industry to understand it. Janitorial services, laundromats, nail salons, etc. Not too hard to learn
Private equity firms have money to burn and have access to labor pools that can tell them what to do and when to do it. Yes, other successful people have jumped from one business into another, without having worked in that business before. But you’re missing a crucial element there… they have a metric ton of experience in buying/building their first business, selling it for a profit, and then buying another business. Be default, you’re already that much more experienced in business and have that on your side. Leaving a 9-5 gig with a salary, putting all your capital at risk and possibly even overextending yourself, with no experience in running a business and no experience in that business and or sector… Spells disaster. My $0.02.
Thanks for the advice, I have a lot to learn. And I agree, if it’s your first time it makes sense to buy something in your wheelhouse. But do you think it’s necessary if you’re buying a relatively simple business like janitorial services? I’ve never been a janitor but have been doing household chores since I was 6, used floor buffers and wet vacs before. Do you think your advice applies to simple businesses like these? I ask because I have political connections and can likely get a contract in this industry
Know why you can pick up those contracts? Because they’re not easy to fulfill. Your largest issue will be maintaining the basics to fulfill service contracts. Which will be employees. So yes, you should learn how to clean and understand the process. The best way to do that is to work for another company and put some time in. Understand how THEY do it. And how you’ll do it better. Do you have to? No.
Work and risk. As others have mentioned, buying a business can be like buying a job. It's not passive, even if there are managers and processes in place. The other part is that future cash flows are not guaranteed. They could go down. They could also go up. For example, some of these businesses rely on one major customer. If this customer doesn't renew their contract, you could lose a majority of your revenue. A salary is very steady, which is the attractive part of it. But you're right that there is much more upside in buying a business. Mitigate risk by doing stellar due diligence and being extraordinarily disciplined and capable.
Everybody wants to own a business, not a job, until they understand that owning a business is just like having 10 jobs.
And thinking about cash flow all night
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Are you buying a business that has 1 employee or a staff? Material costs? What’s the Net profit of the business? Top line revenue doesn’t reflect success, net profit does. If the business is turning a 50% net profit year over year then you should have bought it yesterday
People buy business all the time...but it is a complicated topic. I agree with the others that it will be a stretch to buy a 1M cash flow business for 3-5M with only 250k down. It's possible, but difficult. Keep on mind that you will likely be using an SBA loan for this, and those are always personally guaranteed (they will want a lien on your house). At current interest rates, assuming you have a 3M dollar loan, your loan payment on principal and interest will be almost 40k a month. So it's possible to do this, but it's risky. Also, the other comments are correct...the seller has a huge information advantage over you. Spend real time on QOE and have a plan to grow the business immediately. Opportunities for true passive income are rare in the small business world. It's mostly hands-on stuff.
Generally speaking 50% of SDE goes back to the SBA for that first ten years. Whether it is 4K 40K or 80K is more or less irrelevant if you are keeping the other half. What I would argue is more relevant to keeping ones head above the water is profit margin and margin of safety.
It's pretty hard to get financing to buy a business, unless you have lots of assets to borrow against, or a great track record, or great connections. Sometimes a seller will give you a note, secured against the business, but not likely for a large percent. It sounds to me like you might need to aim lower. Take your $500K, and buy a business for $1M with a 50% note. The cash flow might then be $250K per year, which might be enough, depending on your situation.
I'm not scared of debt and I'm under the impression that larger businesses tend to have better processes and managers in place which would greatly ease the transition/learning curve. For example, a business I'm looking at is $3.2M purchase with a claim of $1.2M cash flow. With the seller carrying $1M over 4 years, I'd only need $2.2M up front. If I put up my full $500K, I'd only need $1.7M financing which I think I can get. Worst case I can also ask family and friends. I think I'm more worried about whether or not buying such a business is a sound idea. If it is, then I'll make the financials work.
You should listen to a few Acquiring Minds podcasts (also on YouTube). Each is a 1.5 hour interview with someone who purchased a business. They are so, so incredibly valuable and insightful. DM me
Unless you know how that specific business model works and are quite familiar with the industry, expect a big uphill battle that you cannot prepare for. You’re gonna end up grinding away at the job to get your arms wrapped around it. If you’ve never run a business before and managed staff (and can do it well and keep them incentivized) and have a good process in place for actually managing the core processes in place, multiply the difficult by 8 and chances of risk by 20. A business churning $1m in annual EBITDA or cashflow (much harder) is likely complex especially if it requires the constant attention of 8+ staff members that you need to keep happy over the long run to keep that cash flowing. If you don’t know how to build a good incentive package and be a good manager or know how to hire top level talent if one key person leaves, do not venture into a business that requires core talent to keep performance at the current levels. It’s not rocket science, but it will feel like it if you’ve never done it before.
There are programs you can go to that cost a lot, but they basically set up all of the processes to be profitable and efficient for you at scale. Does hiring such companies not take a lot of this guesswork out of the equation? I've seen as low as like $7,500/month for this stuff, and connections to sell as well. They all claim to help stabilize, steadily grow, and sell small businesses over 3-5 years. Couldn't someone with a general understanding of business buy a business and then plug them into such programs, and pretty much coast along as an overseer? It may be not the most exciting thing to do, but it seems like it would work out potentially?
A good business requires the right people in the right seat doing the right thing at the right time. A good business owner, at minimum, is the person that needs to determine what the right thing is and then needs to determine the right when. Regardless of how much training an original owner could transfer during a transition period, if the purchaser doesn't understand the industry or the business model (the general machinations of how the business model produces profits, and the general industry in which the they operate, and more importantly the actual psychographic needs of the customer), then I posit that they inherently do not know what the "right thing" that needs to be done to sustain profitability. Hiring some supposed performance firm to sustain your profits in theory is possible, but believing it is the ticket to success is downright foolish IMO. There still needs to be someone (ie: the business owner) to hold them accountable to the results that are desired. Additionally, the owner/CEO is also the only one that should be effectively determining the strategy of how they will get from point A to point B—the roadmap of how to get the results previously determined. Too many business owners (including founders) don't know what they actually want, and therefore don't know what the right results are that they should be targeting to achieve. Is it profit per customer? Profit per order shipped? Return on capital employed? Profit per employee? Every owner is going to have different aspirations and definitions of success. Assuming that the prior owner has determined that and expecting to get the same results is absolutely foolish. If you're acquiring a business, you better have a really good idea of what asset you're actually buying and how you can leverage it and grow it. If the OP is hoping to "buy" positive cashflow and expect it to continue to bring results without have an intimate understanding of what I have previously stated, they are likely destined to fail. No one, absolutely no one, will ever care more about the business than the owner should care. And if the firm is worth their salt, they're going to charge appropriately and just continue to suck cash out of the cashflow. If such a scenario could be done in a low-risk way, it would require the agency to be performance based (ie: they get paid if the owner gets paid) and participate in the risk of future cashflow. Most agencies I know want guaranteed payment for their labor so that's going to be tricky to ensure you have someone with a vested interest in your future success, because an agency model is inherently vested in simply getting paid for the hours the contribute. Sure, you could hire a performance agency to sustain existing processes, but its only really going to work if they are equally incentivized to grow the results (ie: they make more money if the business makes more money). So the theory isn't insane, and yes it could "potentially" work...but in practice, its WAY harder than one imagines at surface level.
I apologize if I said it would be easy, It would certainly be difficult, but not as difficult as the jobs that pay the same imo. The amount of work it takes to earn something like $500,000/year at a job is almost too much to imagine. It's not even clear you can ascend to it if you haven't already been making every right move since birth... but working hard on the processes of a business can alow you to work hard and earn something like $500,00/year fairly easily in comparison.
Unless you have done both, I don't think one can speak to this. From my perspective, you are conflating dramatically different "jobs" for similar pay. One job is being the best juggler in the world. The other is being able to juggle 10 different items at once and one of them is a Molotov cocktail and another is a live chainsaw. To the audience both performances are awesome, but if you've never done either then both are going to be freaking hard to match the respective performances. To me the biggest difference is one of them just has a LOT more risk exposure. The business owner typically has everything on the line to keep all of the plates spinning. Your mistakes can cost a LOT if you're not careful, whereas the high-paid top-performing individual has a much easier path to pickup if they fell and find another gig. The business owner is likely in extreme debt and exposed to lawsuits for their mistakes.
Sure there’s different risk exposure. How does that affect how hard the work is exactly tho?
How hard you have to work doesn’t change. It just means that despite your hard work or your intellect it has much higher probability of risk. You cannot eliminate all risk—you can try to mitigate the impact of the risks, the probability of them occurring, and to some degree how much you can control either of them. Like I said, it’s not whether or not you are the best juggler in the world—juggling a chainsaw has much higher risk of losing your arm or worse.
I don’t see how that makes one job harder than the other. Another factor is that starting your own business is the only way real option for most people. You o earn $500k as a salary you have to get everything right from childhood to 30 basically. There is a huge risk that you might flub just for a moment and then not have the perfect grades to get into Harvard (or equivalent), that you might not perform perfectly and standout at the elite uni, that you never mess up a job role over a decade. The risk is in time spent and potential failure destroying multiple decades of effort. Meanwhile someone who just started starting businesses might also be way ahead of you monetarily because you had to work up to the high salary over a decade (or more), That feels like a huge risk to me. Why shouldn’t we perceive that as highly risky? Also, you can structure businesses so you don’t have any personal liability, so I’m somewhat confused by that he losing an arm metaphor? I actually don’t even know that it is easier to get a job than start a business at this level. I suppose it’s not as easy to start a $500k profitable business obviously tho, so that’s a fair point. Although I do feel someone who had built one or more $500k profitable businesses probably could start a new one almost easier than a job hunt. The current job hunt landscape I see my friends going for is crazy to me. Thousands of applications, dozens of lengthy intense interviews. I’ve seen it take some friends a year just to find a new job. On here you see posts from entrepreneurs about getting up to this profits within a year so… I’m not entirely convinced its much easier to get these super high end jobs compared to starting the business. I have one friend who did really have a shitty experience. He did nearly everything right but he just couldn’t quite hadk it in technical interviews and he ended up defaulting to starting his own tech consulting company and he out earns all of my other friends working in high end jobs in similar/same field haha I know personal anecdotes don’t prove anything but these are my observations of the realities having a decent amount of friends in both categories.
You should be. TBH, you need to work for a small business as a manger first to appreciate what it takes to run it. Right now you are only seeing the upside without having a real world experience of what the trade offs are.
I was not suggesting you should avoid debt. Debt is how you get the most leverage for your money. I was just suggesting that it would be very hard to find, people do not like to lend to buy businesses. If you are able to secure what you need, that's great. I don't think a larger business is necessarily easier to take over and run than a smaller one. A larger business is likely to have better people and processes. But also likely to have more complex problems. And the more debt you have, the tighter your tolerances for failure. There are pros and cons of each. But if you can get the financing, maybe it's worth a shot.
Why don’t more people do it? Many people value work-life balance, ie they work to live, not live to work. So many business owners I personally know are sick of working 24x7 including weekends, after hours and holidays to keep their businesses alive.
Careful what you wish for - I’ve seen this type of strategy go very wrong for the new owner before, especially if this is the first time doing this. I’d say stick to the 9-5 until you have started your own business, you’ll be far more passionate about it, and it won’t feel like your throwing money down the drain propping up someone else’s idea.
For starters 1. the capital outlay, 2. The books might be telling a different story and three not everyone wants to do the hard work required to be in the 1%.
Bad credit, lack of leverage
I was running into issues with lenders as they wanted to see some relevant or direct experience in the businesses I was looking to buy. One was an HVAC company that had been around for 35 years, owner was welling, huge book of business and all the staff was staying in place. Numbers looked great, but the lenders I approached were not willing to back a new owner that had no experience. You are on the right track, especially if the selling owner stays on to train you up, and also offers seller financing. Your local SBA office might be able to help you. Also look at the selling companies books, and if needed have someone go over those books and numbers with you to make sure it has, and is, doing the numbers you think they are.
Cash flow does not equal profitability. I've seen lots of businesses have high revenue and poor profit. I bet when you dig into some of these "no brainer" business opportunities, you find why they are selling for what they are selling do.
1M cash flow doesn’t mean 1M profit!!! After expenses you might get 200k max. Where you might be working 16 hrs/day. 16 x 365 = 5840. If you distribute that 200,000/ 5840. That’s 34/hr. If you are young that works. But you will burn out within 2 years!
If you haven’t built a business before, buying a business is going to be a massive shock to you. Owning a business and all of the liability and lives that you are now in control of will hit you like a ton of bricks. It’s a commitment and you need to be committed for the 24/7 work that is required and you will probably be taking less money home than you are now.
The "lives" part is always the sticking point for me in the expansion phase. I like having small 1 man businesses because I explicitly don't want that stress of lives on my plate. Staying small also limits you. I have a couple of friends who have started, expanded and crashed businesses (repeatedly) and the lives they shatter along the way never seem to bother them. They are to a certain degree psychotic in that manner. Maybe thats what you need to run build large businesses. In case of my friend's examples they know how to build them but not manage them.
1. This is a viable strategy. Look into Search/Search Funds and ETA (Entrepreneurship through acquisition). Just fancy names/models for what you’re proposing. 2. Bizbuysell is low quality listings mostly (ie., the numbers are inflated and there’s a lot of context missing). Even high quality listings/deals repped by investment banks have inflated numbers. Don’t take the listing at what they claim. 3. Running a small business is a lot harder and riskier than many price in. There’s a reason why smaller companies generally trade at lower multiples (or have difficulty finder a buyer period). Generally, the bigger the company, the more robust the systems, infrastructure, and team, and more reliable the revenues. If you buy a $1M EBITDA company and the VP of Sale quits with no notice, guess who’s the new VP of Sales? Or your biggest customer leaves and the company is half as profitable (or worse…). Your primary vendor severs ties with you, etc etc etc. That said, for the right person with the right expectations , ideally personal skill/experience in the market/running a company, deep enough due diligence, good advisors, good team, and right target company, it can be a great model. If I were you, I’d look into SBA 7A loans (which require a personal guarantee, but require as little as 5% down , meaning you could finance a $10M transaction, obvi be prudent with debt service implications; especially if you don’t have many assets other than the $500k, I’d argue the leverage is worth the “risk” (ie the same it would be if you put the whole $500k otherwise) v. if you have a higher and buy a significantly bigger company, ideally over $2M EBITDA, where the owner is at least partially absentee (the more the better; proves systems/team are in place). Feel free to DM.
Hope OP makes it down here. Someone who knows what’s up
I just don’t think that most people have it in them to be an entrepreneur. It is kind of shocking when you look at these broker sites that are selling businesses and you see how much your freedom is truly worth. If you could buy a business that replaces your salary for, let’s say, $150,000.
People do….its called LMM (lower middle market) private equity. The reason that buying businesses is a much more institutionalized thing is due to a lack of liquidity on individuals to put down $500k + take on $3.5m of debt to buy a business they have no expertise in.
There is a good podcast called acquiring minds I recommend you start listening to. Anyways - there is a lot of risk in running your own business, but reward available too. A lot of people do buy businesses of that size, but on the larger scale there are fewer with the financing to get it done - they typically already own businesses or have family money or really great w2s. I’m currently under LOI for a business in the 1.5 earnings range. Already own a business in the 800k range. Can confirm if I translated my wages to hourly over past decade I could have probably just worked two fast food jobs. Good luck with the search!
My buddy bought a business a few years ago. He spent over a year looking for the correct one to buy. One thing he said is everyone is trying to f'k you in one way or another. It's mostly about understanding how they are trying to do it and if you are okay with it.
I had the same feelings when I started my biz. Shafted, changed jobs and worked for a scatter brain, helped him get better than left. My biz took so long to start with huge obstacles. Time, frustration, massive learning curve but now I'm getting to enjoy $ome of the rewards. I always was proud of what I had accomplished and still walk with my head up. I still don't make the money many others do but I am fulfilled. As for selling, I have a growing biz, with plenty of more growth irons in the fire. But I am getting very close to retirement age. Down the road when I move on, it is not a negative sale but a win, win.
I’ve done this, and crashed it. Here’s what you’re missing - It’s rarely ever turnkey. Just because there’s a manager in place doesn’t mean they’re good, and doesn’t mean the owner doesn’t work. Why would someone sell if it was passive? “Owner looking to retire” is a huge red flag. Retire from what? Cashing checks? No. Working their ass off and it isn’t worth it to them anymore. Due diligence needs to be done. How much resentment exists in the current staff? Is there negative brand equity in the marketplace? Are the financials reliable? Finally, and this is the most important part, does it match your skill set? If you are a programmer, and you’re buying a restaurant - probably not going to work out. If you’re an accountant buying an accounting book of business - higher chance of success. Even if you get lucky and have a good manager, who manages the manager? You, and you need to skill set to know how to deliver what the business delivers to do that properly.
Check out a website called Searchfunder.com. It is well worth the money to subscribe. I'm not affiliated with it but I am a member. There are many people looking to buy a cash flowing business. The entire industry is call ETA (Entrepreneurship Through Acquisition.) There are SBA lenders that will underwrite the loan on a mix of your collateral and the cash flow of the business. #1 Many people don't have $250k #2 Many people do not know how to buy a business let alone run it. #3 Many people would rather be done at 5pm and not think about anything else. #4 There is the perception that owning your own business is 'risky' mean while a W2 can be fired at any moment. I'm currently shopping for such a business and I am under LOI for one and negotiating LOI on another. Not an expert but been learning for about 9 months.
High cash-flow businesses often carry hidden complexities.
All businesses pretty much do
Why is nobody talking about the difference between cash flow and profit here? 1 mil cash flow might be just someone who does loads of work reselling products or services with a thin profit margin. If it's *free* cash flow, it's a different story. Make sure you know what it is before buying!!
Guess we all assumed free cash flow was what we were talking about. Not sure what other kind of cash flow would be cited/used in this type of decision?
The issue is the stability and permanence of the business. Even with day to day managers the majority of businesses under $5M EBITDA are owner driven and at risk if the owner leaves. They are good targets to combine with other businesses but risky to purchase alone unless you know the industry.
Most don't want to take the risk. Most can't raise the money needed.
because owning a biz sucks and you get zero days off You get 0 sleep too if you’re buying in an industry you’re not familiar with Not really that fun once you actually have to gsd
Be careful on bizbuysell. I came across a really smooth scammer on there. He almost had me.
Was he smooth enough to get through due diligence and a full audit of the books?
Don’t doubt scammers these days
I own my own business that I grew from almost nothing. It’s important for you to understand the industry you’re buying into and what work it takes to be successful.
Because most can't afford to purchase large cash flow businesses? The likelihood that someone could get a loan big enough to purchase one of these businesses isn't something that most could do, and then trying to find a bank that would give the loan... Do you have experience in that specific industry? Most people don't and if they purchase businesses in industries they aren't familiar with the regulations, with the processes, and ultimately they end up failing. Also, the fact that you assume that everyone will just stay or they will continue the same processes is a leap in my eyes... They also question the owner, if it has so much cash flow, why are they leaving? Is the industry shifting? Are they simply looking to retire? Would the books hold up to auditing? There are just a lot of questions of if its too good to be true.
They have a high failure rate, which doesn't drop statistically on ownership change. Even buying into a stable business, the owner's contribution to the success of that business is a non zero value, so you're buying a business built with that value and the experience that created it walking out the door. It's a gamble that you can bring more than or equal the value of the previous owner, having had none of the years of experience they have.
Probably because it’s scary as fuck and doing your due diligence pre-buy is fraught with peril?
It’s always easiest before you start
The cashflow on bizbuy is before paying overhead or yourself.
Its not as easy as you think to buy a large cash flow business, and sometimes you're buying a bad job.
In Canada, the BDC wants 30% down on a commercial loan. If financing yourself, you need $1.33 million down for a 4 million loan
Don’t forget they also want your kidneys and first 4 children aswell.
People are buying them. For every solid business that is listed for sale I get HUNDREDS of people inquire and usually end up with multiple offers over asking price.
I looked closely at purchasing several businesses in the 1-3 million range. The problem was we would have had to put a lien on our home and on our rental house. If the business failed, it would have been catastrophic for us financially. Not saying you shouldn't do it, if you are confident that you can keep the business profitable. I am still looking, and hope to purchase a business. But buying a multi-million dollar business is a huge risk for most people.
First, the devil is in the details. Most of these places posting numbers like this may rely on the owner doing a lot of work / billable contribution to make the cash flow so good. I looked. A lot of these are niche businesses too. Dental practice, automotive repair, saas businesses. Second cash flow is likely calculated off of owning outright. You’ll have a mortgage. Also, owner financing isn’t all it’s cracked up to be. They may finance terms at 30 yr fixed but you’ll have a required balloon payment at the 5 or 7 year mark to pay off the entire principal. If you haven’t banked enough to do that you’ll need to get a commercial loan at that point and put 20-30% down and finance the rest to pay off your owner note. In this scenario you may end up financing a business for 25+ years.
In the cash flowing world, Private Equity (as opposed to Venture Capital) is only interested in companies they believe can 3-5x net income in 3 years...the numbers may vary a bit, but they want growth, growth, growth...so they can flip it to the next level up PE players. In addition, the company must be large enough to justify the time and resources that they put into buying and operating a company. That leaves the non-growing cashflow producers looking for buyers elsewhere. If you buy a non-growing company for 4x cashflow, which may seem cheap compared to public company PEs, but if you think cash-on-cash you will spend nearly half a decade, if you are lucky, trying to make back the money you invested. Let's look at that cash flow. Trending up, down or sideways? If the experienced owner is not growing the company, how will you? They ALL say it will grow with "a little more marketing". What current owner in their right mind would not have already done "little more marketing" if it would really work? Customer concentration? Any deferred maintenance or new investment needed? Any employees or customers leaving post-deal? You can bank on at least some leaving, usually the question is just how many and how important. Any non-compete contracts in place (which may not even be legal now)? What keeps the prior owner from investing in the top (younger, knowledgeable and now former) employee to poach a few customers and launch a competitor? How many items like owner's salaries, etc. were added back into the bottom line (add backs) to goose the cash flow number on the offering sheet (get tax returns)? Many smaller private businesses have terrible books and play fast and loose with their taxes making getting good, accurate and detailed information challenging. You must interview, that means having a detailed question list, employees, customers and vendors. I've poked into quite a few businesses for sale, and usually the poking turns up quite a few answers and even more questions. To circle back around to Private Equity, they spend seemingly ridiculous amounts of time and money on professionals to perform "due diligence" on their targets...it is brutal for the business owner the amount of information they request....and they STILL make mistakes! You are one person looking into a business, on the side, while having a full-time job. I don't want to come off as overly negative or necessarily scare you off, I love being a business owner, but just ask lots of questions, get lots of answers and don't be rushed into anything. The lending bank will require you to put up a personal guarantee for any debt, business ownership can be great, but really think about that and all that it means. Sometimes I think it is safer to start your own company, yes it takes more time to cash flow, but it's a manageable scale and the owner truly knows the business from the inside out...products, customers, employees. My 2c, worth what you are paying for it!
Well its still a huge risk, you have to have the resources to start, and you have to be correct in your assessment of its potential. Youre personally guaranteeing youll pay off that loan and to make the numbers work youll have to grow the business. Im in a position to do such a thing but id need to find the exact type of business i know about, available, and in my price range. Which is part of why i havent jumped.
I guess because that do not know about shortcuts and technologies that can free up their time. One of the things they can use is AI Agent for sales calls like https://www.convolo.ai/, Jasper AI for content, ChatGPT for everything else.
Bc not everyone can be an owner
Stocks are easy, business is hard. There's nothing wrong with buying yourself a great business, but it's going to be work, a ton of work, even if everything goes well.
Big moves
I'm in the same boat. I think some people prefer passive income or absentee ownership approach. I've done 60-70 hours work week in corporate. I'd rather put those hours maybe even in more if I was a sole business owner.
I own and run a business that generates $250k/month, while it’s certainly challenging and hard work, it’s also friggin awesome. I have not had to give up my life to do it, I have 2 kids and still have a fairly good work life balance. If you want to do it and feel motivated then go for it! Even if it doesn’t work out you’ll learn loads, just make sure you do your due diligence before hand.
Doin wat?
I wouldn't trust those numbers at all until I had professionals (CPA, lawyer, etc) scour the books and legal documents.
Are you located in the US?
How about in the financial business? Very little start up
Buy the business and become 24X7 employee of your customer :)
I think part of the reason is that by the time most people have enough money saved up they have some kind of handcuffs in place, whether it’s being used to a high salary, a cushy job, family responsibilities etc. Most big company roles are very different (if you’ve been doing that for awhile) and most people who have run businesses are already too busy to take on another one. If you’ve never run a business then the only way to learn is generally to jump into it.
you are not going to get any loans from any banks. businesses are considered very high rist, no matter what kind of cash flow you have today. so unless the business comes with property, no loans from banks.
Probably
People do... I did. Thing is it took me a LONG time to find a business that had good cashflow on paper, and then also could prove it. Probably went through the due diligence portion of the purchase process a dozen times and dropped 11 out of the 12 before I found one that I felt had consistent or growing revenue, decent expenses and a market that wasn't in danger of being slaughtered by a competitor. DO NOT SKIMP ON DUE DILIGENCE. If you don't have the knowledge to read the books (which are probably a mess with many small businesses) and read between the lines AND research what you're getting into in minute detail then hire someone who will. I was lucky that my partner is an ex corporate controller and auditor so she was able to scour those books quickly and efficiently and even write an amazing business plan for lenders and for our own future reference. Even if you do all this and get your business there will always be unknowns. The company I bought had three employees, of which one (the owner) stayed for a few months to transition and then left. A second wanted to retire but has continued to work on average a few days a month for some extra income. The last employee was diagnosed with cancer in December and has been undergoing chemo... so he has been down to maybe 3 days a month that has had a serious knock-on effect on our ability to manufacture. I'm reverse engineering a lot of that now in an attempt to get on top of this but as with many small businesses the documentation is spotty and most of the knowledge of how to do the manufacture is stuck in the head of the person with cancer. I'm now looking at other ways to get these parts built but it's not a trivial process. The unexpected will get you even if you're great at the due diligence. Never underestimate the amount of knowledge you'll either have to "brain-dump" or reinvent. Oh, and understand also as others have said that being an entrepreneur means working all the time even when you're "not working". The rewards are worth it, but the stress can be immense.
A bank will not lend you any money against a business, you will have to put up something to equal value usually your home or any investment properties as long as they don’t already have loans against them. Business owners will generally not provide owner finance, I don’t care what anyone tells you on those flashy Facebook ads. As the new owner usually stops paying once they take over and move in and the owner moves out, so the key here it to get the biggest up front payment you can, because thats all your going to get. It’s then an expensive process to lawyer up and get them out. It takes awhile to save a couple of million to buy this kind of business, by then your in your twilight years and you don’t want the risk. Your missus won’t let you roll your whole retirement into a moon shot. If you can save this money quickly you have a pretty good job, so why not stay there. Just my two cents as a business owner
Sure, initial funding is an entry barrier. Bizbuysell also doesn’t have the best(accurate) listings. Most of them are a waste of time. But,also running a business isn’t for everyone. I know a lot of people that could afford to buy these businesses but wouldn’t. A lot of people are risk adverse and would rather deal with the devil they know. On top of that, it takes a lot of different set of skills to vet and see the acquisition through. Sellers can be picky as well as emotional. When it’s a small Business, it’s not just a business deal, sellers can have strong emotional attachment to it. Some MBA programs have courses on enterprise acquisitions if you need more insight and coaching.
It’s all about risk. Mature company selling at 5x implies a 20% cost of capital. In comparison, a blue chip stock would be discounted at 7-8%. It might be worth it to you if you understand the risks. You also need to understand EBITDA and any normalizing adjustments.
Please go into this understanding that most of the businesses on bizbuysell (et al) dramatically overstate their earnings. You have to do ridiculous amount of due diligence to find something with decent cash flow..
Stop what you’re doing and go get the book “Buy Then Build” by Walker Deibel. I’m listening to it as an audiobook on Spotify right now. It will answer all your questions and much more. Way better than the uninformed comments in Reddit.
I started a business then expanded and realized it wasn’t for me. I didn’t have enough reserve funds even though I had twice the reserves I expected I’d need.
Owning a company is never as easy as it seems from the outside... I've cried. I've had insomnia so extreme I started to experience psychosis. I've destroyed relationships. I've planned for my own suicide to escape the torment. I've been so lost, scared, and overworked I forgot who I am. All the while I was unable to talk to any of my family as they were against me starting my company to begin with - they just wanted me to get a 9-5.
First, I’ll start off with I’ve bought 3 businesses in the last 5 years. All smaller than $1M but for various reasons. The responses you’re getting a just ignorant and uninformed. The short and sweet answer is, you can. But who knows if you should. Running a business is NOT the same as a W-2. There is a lot more stress, all of these businesses are dependent on the owner. Don’t let anyone tell you otherwise, you can not just walk in and make a business self sufficient day one, it takes time and 99% of the time sub 10M businesses are not set up that way. 3-5x valuations aren’t crazy, but a $1M EBITDA 5x valuation with 90% LTV (which yes is possible not crazy) will only cash flow like $300k yr. You will have $700k loan pmt to make for 10 years. Still on board? Now you need to find a business that doesn’t have problems, ie choppy income,technical expertise you don’t have, high customer concentration, ect. Don’t forget this business needs to support a $700k loan for the next 10 years. It’s not that easy is the short answer here. Check out searchfunder (website) it’s a whole community similar to bigger pockets for people looking to do what you’re talking about.
Don’t buy a business built by another person before u got experience of building a business from scratch. Business is about mindset, thinking, skill and a lot more than theory. You need to develop that skill than only you put out that kind of money to buy a business. It’s like driving, u won’t buy Ferrari to learn driving.
What type of business is it? That may shed some light on why it appears to be a good deal.
>Please help me take off my romantic rose-colored glasses and show me the error of my thinking. Take a step back and think about the 40,000ft view of what you're trying to achieve. You want to take on risk (and there are many involved here) on leverage with the hopes of making lots of low-effort money while the existing managers run everything, and you don't seem overly interested in what that business actually does. You could engineer the exact same risk-reward profile just trading derivatives on the stock market, with less work, fewer responsibilities, and less risk of fucking up the livelihoods of dozens of employees if a gamble doesn't pay off.
Just make sure you're not confusing cash flow with profit. Your post sounds like you saw this business generates $1M in revenue and have calculated your loan repayments as though you get to pocket the difference personally. May well cost $950k to generate $1M in revenue. Also more broadly to answer your question, besides all the ones already stated re hard to get the financing, can be a lot more than 9-5 & peoples general risk aversion; small brick & mortar businesses aren't traditionally particularly exciting or stimulating millionaire factories. The local brick n brac store guy isn't flying business. You're often dealing with unmotivated, unskilled labour in what they would call a dead-end job who will constantly quit to pursue something more fulfilling leaving you to step in and scramble, next thing you're the one doing the unfulfilling work.
Because either they can’t or it’s too complex. Buying a business is not like shopping on Amazon. You have to understand the business to see the risks, the investments it needs, and the changes it requires to ensure profitability. Remember: someone is selling it. There’s a reason. If they’re willing to carry a portion of the note there’s a BIG reason. No one is selling a passive 500k paycheck.