How much does it cost to buy a business?
The truth of how to structure the purchase of a business...
There’s a lot of people that tell you that you can buy a business for nothing and in most cases, you’re going to scratch your head and ask… “How does that work”.
Most Entrepreneurs that I meet generally believe that buying or acquiring a business is out of their reach— like most things in life, few things are out of reach, it’s simply the fact that they don’t understand it well enough or are a little afraid.
Further, even more Entrepreneurs that I meet don’t understand how valuable it is to buy a business and having the skills of building and scaling a business realize how it’s likely one of the best ways to multiply wealth and one of the most secure, high-upside businesses available.
I wanted to give you a behind the scenes look of how much it actually costs to buy a business.
I’m going to give you two examples, of acquisitions that I’ve made in the last 6 months. I’m going to preface this with an important note, which goes as follows:
If you’re going to buy a business that’s for sale, it’s generally not going to be a great deal. Further, if you’re going to buy a business that doesn’t have issues, you’re also going to pay a premium. My model of investing in businesses is less on buying businesses that have an excellent multiple and are completely hands off, but rather, businesses that I can easily bring massive value and then create high profit and potential resale value (for someone who might not have the skills that I do).
In truth— this is the benefit of being an Entrepreneur-first investor in businesses. Your skillset, expertise and wisdom? They give you a massive unfair advantage.
Our first example is a niche based website that was for sale for $1,000,000.
In total, this website had very little of a business model behind it. Simply— it was a website with over 1,000 articles, amazing SEO rankings and anywhere from $30,000 to $50,000 in revenue each month, with only $3,000/month in fixed costs… and over a million monthly unique visitors.
The value add here is simple…
I own other websites that need this traffic
I have clients who have products and offers for this audience
No other monetization has been used
No other traffic sources has been used
The owner and operator were SEO geniuses but not Online Business geniuses
In this case, the website is generating between $30-50K/month and in total we were able to purchase the website for $800,000.
On the low-end, that means that if I did nothing in about 3 years, I would have my investment back and it would be generating returns, plus it would be worth about the same amount (or more).
If I implemented a growth plan, diversified traffic, revenue and increase revenue and then rolled it up with 5-10 other websites and businesses in the same niche, my ROI will be… excessive.
In total, the total cost of this business was $800,000 and here’s how I broke it down:
$200,000 - I raised $200,000 from a few clients who had a high chance of benefiting in their own business due to the traffic. I structured this as a revenue-share that was activated after the first year for a total of 9.5% of future earnings with a 36 month buy-out clause.
$380,000 - I took a revenue-finance based loan with 15% interest against the business itself from an investment bank. Essentially, they take a percentage each month, at an interest rate of 15% per year, against the revenues of the business.
$220,000 - Owner financing based on a payment term of 12 months with zero interest.
If you aren’t good at doing math, like I am. You might of noticed that I didn’t spend a single dollar upfront on purchasing this business.
I simply showed 3 different people (my clients, a bank and the owners) that I had an amazing plan for building the business along with the fact that I would be able to pay it back, regardless of the success of the business.
Now, in truth: This isn’t a massive business and I could of paid for it in cash, if I needed too… however, I’ve learnt something in business:
The more people you have rooting for you, the higher a chance you have succeeding— as long as those people don’t have control over the outcome.
I own this business with 100% ownership, however, I have 3 different parties that are now helping me.
My clients, who are helping me monetize with their offers and products.
The investment bank, who has already introduced me to an off-market deal that will go along with this deal extremely well and who I’m building a better relationship for the deals in the future that I may not be able to do myself.
The former owners, who agreed to stay and work on the parts of the business that I don’t know super well for a year.
In total: The value of having other people help purchase this business exceeded the value of simply owning it.
There is one big “but”…
If I didn’t have the capital, this deal wouldn’t make sense… and here’s why:
In the first weeks of buying this business, we added about $17,000 in expenses to the bottom line for growth, if you take that and the cost of the investment bank, we’re at breakeven without a dollar to grow it and also down another $18,000 month to take care of the 12 month owner financing.
In this case: The money from the 12-month seller financing is coming from The Wisdom Group AND the money for the investment bank is also coming from The Wisdom Group, until that loan is paid.
This allows for this business to reinvest 100% of the revenue back into the business, while being able to take control of the business.
Why do this? Simply put: When you do the calculations on inflation, interest, opportunity cost and the way cashflow works when you have 30+ businesses… it simply makes sense to do a deal this way.
Further: In about 12 months, we will have a business that we will own 100% that we expect will be generating between $125-$200K per month.
On the low-end (we don’t roll the business with others) a business like this at $200,000/month with diversified traffic and revenue would be worth somewhere in the range of $7.5 - $10M, if we roll it up with others, we then have the ability to sell it to private equity which is looking to get a smaller (but more guaranteed) return.
“Okay, awesome… what about that other example, Scott?”
I thought you’d never ask.
The next example, was someone I was partnering with for another business inside of The Wisdom Group.
Shortly after we decided on a partnership, he messaged me and asked… “Can you just buy the business from me…?”
Simply put— he just wanted out and instead of trying to package it to sell (6-18 months) for a great price, he wanted me to buy it.
In this case, there were a lot of pro’s for someone like me on a strategic basis and it was a deal that I truly couldn’t lose on and he couldn’t lose on.
I wanted the cashflow, audience and I.P and he wanted to get into the next thing.
The business did nearly $2 million in 2022 with about a 50% profit margin— however, majority of what you would expect with a business like this wasn’t there AND that was a good thing.
See, when you go to sell a business, the higher the risk, the lower the price. In this case, the business— for a buyer who either didn’t have a strategic play or doesn’t understand the deeper working of Online Business would see this business as a massive risk and that was going to hurt his multiple deeply.
In buying this business, it’s going to allow us to fuel other parts of our portfolio and package this business to be sold— if the opportunity occurs.
We purchased this business for $1,100,000.
It was structured across 24 months with a monthly interest of $10,000, which if the entire amount is paid early, the interest would not be payable.
If the entire 24 months is taken, it will cost $1.34M.
In total, the business is generating about $150,000 in monthly revenue, with a straight profit margin of just over 50%. If you did the numbers and understand multiples, the numbers on this business is great— but again, this deal had a high level of risk and that risk?
100% of sales came from a single source, there is no management team and many of the parts of a typical online business isn’t present.
Don’t get me wrong, it’s an amazing business and the Entrepreneur is also amazing (and becoming a great friend)… however, for an outside buyer, there would of been a high level of “convincing” to make this deal happen.
In lieu of that, it allowed me to structure this deal over 24 months, using The Wisdom Group’s capital to pay for it, allowing for this business to keep it’s profit for growth and expansion.
To sweeten the deal upon finalization of the purchase I was able to secure $470,000 in low-interest credit against the past revenue of the business paid back over 5 years.
In total, the upfront payment on Day 1 was $56,000, I created $150,000 in revenue, added a massive asset and was able to add almost half a million dollars in low cost (11%) capital for expansion.
But why not just pay for it and not take the interest charge? Again, like the first example. If you factor in the fact that the former owner is still advising and helping on this business (and potentially some of our other businesses), became an investor in The Wisdom Group, that the cost of inflation is the same as the interest rate and that it allows us to keep over a million in capital freely available. It simply makes sense.
In this case, we believe that we can push the revenues of this business to $300,000 without breaking a lot inside of the business, upfront we’ve added about $21,000 in expenses for a management team. My intention is to either merge this into a small profitable “pod” of businesses or to stabilize the revenue and business around the $200,000/month profit mark which should again make it simple and easy to either keep it running or sell for well over $5 million (worst case scenario).
Here’s the other side of this story…
Which I think has to be told. In both of these cases, the owners of these businesses wanted to sell them, but to sell them to the right person. Further, they wanted to sell in a way that didn’t involve a long drawn out process (the last example was done in a total of 10 days from first message to the signed contract). Plus, they knew that there were a level of risk inside of the business that they both weren’t an expert on solving, nor, did they want to spend the 12-24 months to solve.
The moral of the story for selling your business is inside of this… You either sell your business for a bit of a discount (or creative terms) or you spend 2+ years building a business that is turnkey, allowing you to get the true “investors” (that might not be like you and me and looking for value-add opportunities).
Buying a business is much like buying a home…
The same dynamics occur. In the cases where I’m buying businesses, I’m buying the one’s that are on a nice street, but they aren’t the best house on the street.
That’s my investment style, because I have a lot of value-add that I can bring a business and a lot of value a business that I purchase can bring me.
When buying a business, you can go from putting $0 down, to paying all of it in full. However, my suggestion is a place in the middle— if not, you generally end up getting a bad deal… a bad house in a not so good part of town.
Further, even if you do a deal structure like I mentioned in both these cases, it’s extremely important to be well-capitalized or have a much longer term than I spoke about in these examples. Simply put— if your business is going to pay for the financing of the lower upfront fee, the growth of the business will suffer massively.
Hope you enjoyed this breakdown… until next time…
- Scott Oldford