In less than 60 days I managed a 28% ROI netting me a quick $1400 in cash with almost no work and minimal risk.
Now of course these deals don’t come along everyday but you have to be ready for them when they do… And it wasn’t luck in the stock market, flipping a property (cause that takes lots of time and risk), or even growing my business. Nope – this investment was a motorcycle. 🙂 One that I bought, put 1444 miles on and sold for a quick profit.
Ironically, the formula I used to make this deal work has a lot of parallels to buying, building, and selling a business. Here are a few:
- The most important part is always the purchase. No matter how hard you work to build a business in a short time, the purchase price is what dictates your ROI.
- I knew a good deal when I saw one and acted quickly. Honestly, I know a lot more about motorcycles and engineering then I know about business so even though I knew the price was right, I did my homework and verified that the bike was WAY underpriced.
- I was in the right place at the right time. Granted, with business if you’re willing to travel you can always find the right place at the right time. If not, then sometimes you get lucky and find a no-brainer like I did with the bike.
- The bike required some minor maintenance and cleaning that I knew how to take care of.
- Selling the bike required knowing where to sell (i.e. craigslist), who the target audience was, and how to build value in the bike including negotiating a fair selling price and offering additional valuable services in addition to the bike (i.e a free helmet, thorough review of the bike, explanation, and inspection with an experienced mechanical engineer).
- I had to get the buyer and the seller to both like and trust me. The seller wanted cash and all I had was a personal check and a bank statement so he had to feel comfortable enough with me to accept that and let me ride off with his bike. The buyer had to trust that I was accurately representing the bike over the internet (to warrant a 3 hour drive to pick it up) and that my knowledge and experience with bikes was legitimate.
Some of those ideas may be a stretch, however I can’t emphasize enough that the most important part is the purchase price. With that in mind, you better spend time educating yourself on EBITDA and Free Cashflow calculations. EBITDA, as I’ve pointed out, is a bit of a farce, however Free Cashflow times some arbitrary multiplier is more “acceptable” though it’s not without it’s flaws.
Free Cashflow is basically your net income (or profits) with a few allowed add-backs such as 1 owner’s salary, vehicle and other perks. Interest is also an allowed add-back along with depreciation and amortization. At least with free-cashflow we all agree that everyone has to pay taxes regardless of the quality of your accountant. My issues with the free cashflow method (which are important to know when you negotiate the purchase of a business) are:
- Only 1 owner’s salary and perks can be an add-back, however what if the owner doesn’t take a salary because he has a great General Manager (Team Leader) in place? Isn’t that “automatic” business worth more then the one that requires the buyer to be the Team Leader?
- Very few people buy a business without some sort of financing whether it’s from the seller, bank, or rich uncle so completely discounting interest can be kinda silly.
- Depreciation as an add-back again is a bit ridiculous because those numbers represent legitimate expenses that had to occur before and will occur again (though hopefully not in the time it’ll take you to buy, build, and sell).
- The multiplier is “arbitrary”. As a business broker informed me a business is worth whatever a ready, willing, and able buyer is willing to pay. Most business owners think their business’ are worth 1 times revenue and, when you go to sell, if you can get somebody to believe that then more power to you. In reality most small businesses are worth 2-3 times free cashflow which means unless your business is making a NET profit margin of 33%-50% it’s probably not worth 1 times revenue.
Granted, my understanding and even experience with all of these is a bit limited, however the most important things I’m trying to stress are:
- Educate yourself completely
- Everything is negotiable (there are no hard, fast rules)
- Be willing to walk away if the seller doesn’t agree with your purchase price and go find another deal
To your success, Bryan