Transforming $100,000 into $50 Million through Business Acquisitions

Jul 5, 2024

Transforming $100,000 into $50 Million through Business Acquisitions

Introduction

  • Speaker: Walker Diable, Wall Street Journal bestselling author of Buy Then Build and creator of Acquisition Lab
  • Topic: Advanced acquisition strategy for turning $100,000 into $50 million
  • Objective: Understanding the possibilities of business acquisitions over starting from scratch
  • Target Audience: Experienced individuals with an appropriate background and resume

Capital Stack Overview

  • Capital Stack: How business purchases are financed
  • Comparison to Real Estate: Similar to buying a home with a mortgage
    • Equity: Owner's cash infusion (typically 20% for homes)
    • Debt: Senior secured loan (typically 80% for homes)
  • Business Acquisition: Using bank loans to buy cash-flowing businesses that pay off the loan
  • Example: Buying a $1M business with 10% equity and 90% SBA loan

Acquisition Strategy

  1. Target Companies: Focus on businesses with $1-3 million in earnings
  2. Purchase Price Multiples: Buy businesses at multiples of cash flow (e.g., 4-5x earnings)
  3. Using SBA Loans: Up to 90% financing, reducing initial equity needed
  4. Seller Notes & Creative Financing:
    • Seller Note: Seller finances a percentage considered as equity by the bank (e.g., additional 10%)
    • Second Position: Seller is second to the primary loan in repayment priority

Raising Equity

  • Best Approach: Get investors or utilize a seller note
  • Seller Note Consideration: Reduced buyer's required equity, but challenging if dependent solely on seller agreement
  • Private Deals: Approach sellers not actively marketing their business

Structuring the Deal

  1. Ownership Transfer: Seller retains 20% equity in a new entity (NewCo)
  2. Loan Portion: 60% financed through bank loans
  3. Deferred Seller Payment: 20% deferred over time (half as note, half as earnout based on performance)
  4. End Result: Buyer controls 80% of the business with minimal initial investment

Scaling Up: Multiple Acquisitions

  • Acquiring Multiple Companies: Aim for 10 companies within the $1-3 million earnings range
  • Multiple Expansion: Combined earnings increase company valuation, e.g., from 4.5x to 7.5x earnings
  • Operational Integration: Centralize marketing, accounting, HR, and governance for efficiency

Conclusion & Resources

  • Acquisition Lab: Offers education, tools, resources, and advisory for business buyers
  • Additional Resources: Buy Then Build book, YouTube videos, newsletters, and courses
  • Community: Vetted community with 14 advisors, private Slack channel, and no referral fees

Call to Action: Consider Acquisition Lab for structured guidance and support in business acquisitions