We have deals and opportunities come to us every day here at the Institute for Business Acquisitions. While we obviously can’t pursue them all, I think many of them are worth sharing with our community as examples of opportunities that are out there, and how we would approach them.
In this example, we happened to hear of an established pool cleaning business in Austin, Texas. Now, I know absolutely nothing about cleaning pools, other than the fact that they require it, and people will pay for it. Add “Texas” to the equation, where it seems that everyone has a pool and the economy is great, and a deal like this has the potential to be a winner.
Here are a couple of the initial “vitals” on this particular business.
- The company is being sold for an asking price of $376,000
- It lists yearly cash flow of $141,600.
- That would give us a rate of return of nearly 38%, obviously before interest (if we finance) and taxes.
- It is a 7 year old company, so while not extremely old, we would qualify it as “established” at this point
- It has 4 employees, all of which are trained to conduct the cleaning services, and one has additional training in repairs
- It has 163 established accounts generating a guaranteed $31,366 per month, or $376,392 per year (no coincidence that this number matches their asking price)
- Seller is willing to finance up to 30% of the deal, or approximately $112,000.
- The stated reason (at this point) that they want to sell is “other business interests”.
Ok, so those are the vitals. Although we would obviously have a lot more to learn about this company, these facts would get you off to a good start if you are looking to get into a business of your own that instantly can earn you up to $141,000 per year, and isn’t real expensive and seemingly wouldn’t require a ton of industry experience/knowledge. (we talk a lot about the next steps in our free Business Buying Support Forum, which you can join here.
So, let’s assume that you evaluated this company, liked what you saw, and wanted to go forward with a purchase…what would this deal look like? If you’re not paying cash for the entire thing (most won’t, and we don’t recommend that), you’re going to need a finance source. With an acquisition like this, with very limited physical/tangible assets, traditional banking probably won’t be an option. You will either be looking at an SBA (Small Business Administration) backed loan, or private financing such as a personal loan or bringing on an investor. We would recommend SBA on this one, because you will retain all of the equity, and be able to stretch out your payments over several years as to maximize your personal cash flow.
So let’s take a look at a typical financial set up for this example. Note, although there are ways to get a deal like this funded with zero money down, we’re going to go with a more standard scenario that we know most banks will do all day, which is an SBA backed loan with 10% down from the buyer (takes into account the 30% seller financing).
Here is a snapshot of what the funds to purchase the business would look like:
|Purchase Price||$ 376,000.00|
|Seller Financing||$ 112,800.00|
|Bank Financing||$ 225,600.00|
|Cash Out of Pocket||$ 37,600.00|
Now, let’s take a look at what the yearly income for you looks like during the period that you are paying the business off. I used 2 common figures for the loan terms: 6% interest from the bank over 7 years, and 7% interest to the seller over 5 years. These can be adjusted depending on the situation. Sellers, however, usually don’t like to stretch out much further than 5 years (many want 2-3), but banks will often go to 10 years on an SBA backed loan. So here’s what your income before taxes would look like, while you’re using the income of the business to pay itself off.Depending upon the details of the business (once you dive in), you may want additional cash on day 1 to fund ongoing operations, which can usually be worked into the deal either from the seller financing or the bank. For this example I am not including that, because on a company this size, it should be fairly minimum, and wouldn’t dramatically change the financials or return on investment either way. Just note that it is common to build additional cash into the deal, and banks are well aware of this….they do not want you to fail for lack of cash.
|Yearly Cash Flow (Before Note Payments)||$ 141,600.00|
|Bank Payments (6% Interest over 7 Years)||$ 39,548.28|
|Seller Note Payments (7% Interest over 5 Years)||$ 26,802.96|
|Net Cash Flow After Payments||$ 75,248.76|
$75k per year, for the 1st 5 years, then a little over $100k for the next 2 years, and then both notes are paid off, and you will have the entire $141,600. Of course, this also assumes that you do not grow the business during that time, which isn’t likely to be the case. We tend to estimate growth modestly while we are paying off the debt (so we do not end up taking on any more debt), however if the company has been steadily growing over the years as it is, it’s safe to assume that it could continue that growth. IN that case, you would end up with additional yearly cash flow and/or the ability for you to accelerate your loan payments and own the business free and clear even sooner.
This would be a great scenario for someone who wants to get out of the daily “rat race” of their job, and start making money for themselves in their own, instantly profitable company. As we mentioned above, there would be a lot to learn about this company prior to striking a deal, but if this is the investment and income level that you are comfortable with and interested in, this would be an example of a deal worth pursuing.
I hope you enjoyed this post and learned something from it. I will be posting more examples purchase opportunities as they continue to come across my desk, so keep your eye out for them. You can also have articles like this delivered straight to your inbox (I won’t SPAM you, I promise), by joining my mailing list here.
I hope to talk to you soon in the forum.
Institute for Business Acquisitions