The Entrepreneur's Guide to Business Acquisition Part 2

Author

Cashflow Chronicles
November 24, 2023

Week’s Top Picks

Quick Entrepreneurial Tales, Investment Stories, Interesting Stuff & Resources to Spark Your Fire

First up, the most popular news stories and top AI tools to accelerate your entrepreneurial journey:

(1) Runway ML released MotionBrush, an AI tool that allows you to turn pictures into quality motion-animated renders

(3) A 40-year-old only works 5 hours a week and makes $160,000 per month in passive income while revealing 3 complete lies about side hustles

Top AI Tools This Week 🔥

🤖 Clari automatically tracks customer interactions, identifies patterns in customer conversations, and uncovers the most effective strategies for your team which will help you understand your newly acquired business much faster!

🤖 Drift is a cloud-based and AI-enabled sales software that revolutionizes your sales processes. Whether you're running a small business or a large enterprise, Drift is your go-to solution for streamlining your sales funnel and achieving outstanding results

Here's a sneak peek of what we’ll cover in today’s business AI special:

✔️ How deal structures vary with business acquisitions
✔️ Key factors to consider when proceeding with a small business acquisition
✔️ Risk advantage when looking at deal multipliers
✔️ Common mistakes to avoid when evaluating and buying a small business
✔️ Some killer Tweets this week to help you in your business acquisition journey

Hey Cashflowers,

Welcome to this week's dive into part 2 of the world of Business Acquisition. We're diving even deeper into the popular topic of business acquisition with our guests Mattias Smith, Chris Barrett, and Nunzio Presta….

Let’s get into it!

Deal Structures

How Deal Structures Vary with Small Business Acquisitions

From the small business side of things, the most common ways deals work are seller financing, bank of small business financing, and equity into the deal.

If you’re a buyer going the small business route, you have to have 10% equity in the deal. This means you take the value of all the funds like permanent working capital, bank closing costs, your costs, and the small business guarantee fee.

Equity can come from different places in different ways. The obvious and easiest way to do this would be to just have cash.

But not everybody has cash, so other ways to come up with this equity for your small business acquisition would be seller’s finance notes, which are seller’s notes that are building interest.

Now there are many other ways to structure a deal when acquiring a small business for yourself, but to not bore you here we suggest listening to part 2 of our space about business acquisition where you can hear this advice straight from proven professionals.

Now in the end the best advice we can give you is to talk to your financial advisor or whoever is helping you acquire a business, as we cannot give straight financial advice here.

Lookout for these

What to Consider When Proceeding with a SBA

  1. Financial Data: At the end of the day businesses are evaluated on their financials. Sitting down and analyzing financial data is one of the most important things when acquiring a business because that’s where you’ll really find flaws in the cashflow of a business

    Most small business buyers are looking for three solid years of financials and most often normalize numbers, so it’s probably a good idea for you to do the same.

  2. Branding: Especially with a small business, sometimes it’s not all about numbers. You can find some form of goodwill involved in the business.

  3. Deal multiplier: 3x deals are more common but you have to look at what you’re getting for what you’re paying. Would you rather spend the extra and go to 4x to get a management layer for your business, or are you okay running it by yourself? Just know what you’re paying and what you want in return.

  4. Risk: Look at the risk of overtaking the business compared to the multiplier. Do you have solid revenue that’s consistent month to month? Are you going to lose clients or business when you take ownership? Are you going to have to reform bonds with clients from the previous owner? There is a lot to look at for risk when buying a business, so don’t skip this step.

Common Mistakes

Where Do Most People Make Mistakes in SBA Deals?

Most of the time people make mistakes when they get into industries with low common business multipliers.

A perfect example of this is roofing companies:

You can buy a good, meaning large, roofing company for 3x, because it’s an industry with a low common multiplier.

On paper, these deals seem like a home run, but the problem is that most people buying these businesses aren’t former tradesmen or people who have dealt with hourly service work in their lives.

In the last space and newsletter, we talked about how certain businesses can be better for you than others because of your prior knowledge working in the industry.

Now we aren’t saying not to buy a roofing company, as you could be an expert roofer, but we are just saying what we have seen in the past can burn you on a deal that you think is amazing.

In the end this really all depends on where you’re coming from and the experience you have. If you have zero experience working with physical laboring employees who are paid by the hour, we wouldn’t suggest you hop in the deep end.

Another mistake that’s made but is something not thought of is to not let yourself get pushed around after buying a new small business.

Going back to the blue-collar type of business, oftentimes older workers who have been working for a long time are hard to budge to change to new ownership or new operating schedules.

If you let these old employees walk all over you, you’ll end up in a position where you’re not the owner to them, and you’re a person to whom they can say no. As a small business owner, you need to be the OWNER.

The last mistake is knowing investor terms and the terms in different markets that are used to label different things.

When acquiring a business now knowing what a simple phrase like SBA (small business acquisition) can completely leave you lost in a deal and will likely bite you in the rear in the future.

As we said earlier in the newsletter, the best decision for you here would be to talk to your financial advisor or whoever is overlooking the deal and ask them questions about everything you don’t understand.

And with that, Until next time Cashflowers!

Cheers!

Cashflow Chronicles

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