So, you have been reading my Twitter threads for a while now and want to buy a business. You want to become one of the people who gets consistent cash flow every month. But where exactly do you start?
How do you buy a business and start getting paid without wasting years figuring it out? Well, my friend, today you’re in luck. Below, I’m going to share the most common mistakes people make when it comes down to buying a business. Let’s get started.
The 5 Most Common Mistakes in M&A & How to Avoid Them
1) Not All Debt is Bad
Sorry, mom. Not all debt is bad. Well, the pay for college to get a worthless degree type of debt is bad, but a business debt that helps you buy a cash-flowing business is incredible.
It gives you leverage. I use debt for all of our deals. Typically, I put 10-20% in down payment in cash, and the rest is “seller-financed.” Let me give you an example.
If a business makes $100k in profits, usually they are valued at 2-3x more. You can buy a business like that for $200k if you know how to negotiate. Here’s what you have to do:
- Put $20k down.
- Pay $80k by the end of the first year.
- Give the owner another $100k by the end of the second year.
If you’re a real pro, you can use the profits from the business to pay for the purchase.
- Rule #1: Don’t buy with cash.
- Rule #2: Don’t forget rule #1.
2) Never Overpay
It might sound obvious, but I want to save you some headache. Small businesses are worth 2-3x their profits on average. No more. No less.
3) Use Milestones & Earnouts
When you’re negotiating, you have two big levers – Price & Terms. Or, as my saying goes, “You can have your price and my terms, or my price and your terms, but you can’t have both. I prefer to have my terms and their price.”
Here’s why: You can protect the downside AND only pay the price if the milestones hit.
4) Don’t Build a Business When You Can Buy It
One of the biggest mistakes I made is not buying a business. Most people who start a business do it to have financial freedom and ongoing revenue. They don’t want to work 80 hours a week for five years to change the world.
If you want financial freedom, BUY businesses, don’t build them. It boils down to the efficient use of capital. You have two choices:
- Hire two employees and spend $20k on a startup.
- Use that capital to acquire a relevant business and get $100k revenue on day one.
5) Don’t Buy Too Small of a Business a.k.a Don’t Buy a Job
You should strive to buy a business that does at least $100k a year in profit. Why? So, you can hire a decent operator.
If you buy a business that makes less than $100k a year, you’re essentially buying yourself another job. And these deals are everywhere.
You need to find a business that gives you cash flow without you operating it. Yes, it’s hard. It will get ugly. Some things won’t work, but it is possible to buy a working business that gives you a consistent cash flow each month.
Codie & Ryan
Co-founder- Unconventional Acquisitions
If you want to learn more about how to find and buy businesses, check out these articles
- Is Business Buying Right For You?
- How to Guide: Finding Your Operator
- How Long Does Buying a Business Take?!