How to Buy a Business

I struggled to build a business over the last five years. The fact that it has been successful does not mean it was the smartest thing to do. It was a much higher risk than I knew at the time. I have learned a lot and thought I’d share one line of thinking I got from Brandon Laughridge.

You can follow him on Twitter: @laughridge

Buying a business is an efficient path to wealth creation.

One key is to look for businesses for sale at less than $5 million. Companies this size are accessible to non-rich people, there is less competition, and very importantly- the Federal government, via the Small Business Administration (SBA), will finance your purchase.

Let’s look at a $4M deal (don’t get scared, you can scale this down). Suppose you pay five times as much as the business earns before interest, taxes, and such.

Congratulations! You now own a company earning $800k. No, you do not get to keep all of that. You still have to pay your loans. What does the financing look like?

You will put in $200 to $400 thousand, some from the existing owner, and up to 90% from the SBA lender.

But I don’t have $200-400k to kick in, so this isn’t for me? Not so fast. You can bundle together money from other sources and retain majority ownership in the business.

Let’s assume you only need $200k (5%). You should be able to part with 15% or less of the equity.

To recap, you’re out of pocket $0 and own 85%+ of a company generating $800,000. Depending on terms with your equity investor, you could earn about $250k+/year in personal earnings.

Generally, you have a 10-year loan at 6%. So, about $500k in total debt service with $800k in earnings. What does it look like in 10 years?  No growth and your 85% is worth $3.4M, and you earned $250,000 a year while doing it.
This idea will petrify some and thrill others.