Buy a business and make $1M in 18 Months
Buying a business is probably the most challenging, yet rewarding and fulfilling business experience. It isn’t an event but a journey. So, how does that journey typically look? Let’s dig in on this general framework and uncover how we can buy a business and make $1M in 18 months:
- Find a business to buy
- Finance within minimal acquisition deposit
- Grow it
- Sell it for a profit (if you’re not thinking of operating it long term)
Step 1: Finding a business
This is where our marketplace comes into play. You’re looking for a business or franchise that suits your lifestyle, your skillset, and aligns with your goals and objectives. We have listings from every sector across Canada with selling prices between $1,000 to $5m.
But, for this exercise, say you’re focusing on a space like home services—landscaping, HVAC, plumbing, electrical, etc. These types of businesses tend to be profitable, don’t compete with behemoths like Amazon (generally), and there are lots of bigger buyers when you want to sell.
The sweet-spot size would be about $1.5M in revenue $250k in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). That gives you enough cash to make it worth your time, while still being small enough to get it at an affordable price.
The following HVAC company fits the bill. Let’s use it as an example to walk through the rest of the stages in the process.
Step 2: Financing within minimal acquisition deposit
You’ll want to calculate the Most Probable Selling Price (MPSP). The MPSP is an estimate of the value of the business based on a variety of factors including financial records, tax returns, inventory, payables and contracts. BuyandSellaBusiness.com offers some free tools that can help you calculate it. Nevertheless, you should be able to get the business for 2-3.5x EBITDA multiple, which is $300-$650k for the deal in the screenshot above. We’ll be able to negotiate ~10% off the asking price, so let’s say $315k.
You’ll use a loan to buy it. Review all your financing options, as most will want you to personally guarantee the loan. That’s why you need to make sure you buy a durable business that won’t disappear overnight. Personal guarantees can be scary, but sometimes the risk is warranted for the reward.
Structuring most deals with a Canadian financial institution will require you put in 25% equity, and they will cover the other 75%. So, let’s say the business costs $315k, roughly $236,250 from debt, $78,750 from cash. But it can get better if the seller is willing to offer “seller financing” vis a vis a vendor take back note payable. Let me explain:
Basically, you will tell the seller that they will receive 60% of the purchase price up front, the other 35% will be paid out over 5 years and the last 5% is on “Full Standby.” Full Standby Note Issuance Facility (SNIF) is a form of insurance for a lender whereby a bank will guarantee payment to a lender if the borrower defaults on the transaction. The beauty of this is that it gives you an initial $126,000 in working capital to grow the business.
Plus, the 5% on “Full Standby” is considered equity by most financial institutions, so that means you only need 5% total out-of-pocket ($15,750).
Step 3: Growing it
Now it’s time to grow the business. We take the $126k of working capital, and invest in some additional assets (trucks) or human capital (technicians), in addition to marketing. Usually, these types of service companies haven’t done much marketing, so there is a massive opportunity to capture some attention.
The goal is to get to $2.6M in revenue run rate in the next 18 months. Before the deal even closes, we start buying trucks and hiring more technicians. Our target is $250k revenue per technician. With 10-11 technicians, you may be able to hit $2.6M in revenue.
Now it’s time to streamline operations by adding company principles, building a strong culture and adding processes/systems. During the LOI phase of negotiations, spend a few days shadowing a business in the same space that has strong processes and systems. The right processes/systems increase corporate efficiency/productivity and improve customer experience.
Now, let’s dig deep. With the HVAC business in mind, you need to figure out a blueprint, ex. the average revenue per visit:
- Maintenance: Residential - $350 | Commercial - $2,000
- Replacement: Residential - $7,000 | Commercial - $26,000
So, you calculate “we need X visits a month to hit our revenue goals.” Done.
Now, let’s chat about strengthening your organic search ranking. Investing in search engine optimization (SEO) is critical so your business appears high on Google when potential customers search key terms like “air conditioning maintenance in {{CITY_NAME}.” We’ll cover some basic tips in future blogs, but frankly I recommend hiring a professional.
Now, let’s chat about customer reviews. If you have less than 100 reviews and less than 4.5 stars, you need to collect reviews immediately. There are great tools out there that can automate your review collection from your active customer base.
Step 4: Sell it
As per the exercise, let’s imagine that 12 months has passed and you’ve grown your revenue according to your plan. You’re at $2.3M in revenue run rate. Great, but don’t slow down yet. Call the same broker who sold you your business and ask them to start marketing your company (expect to pay 8%-12% of the deal for this); or list on BuyAndSellABusiness.com to save the commission if you think the business is sellable and you have the skill/acquisition team on hand to sell on your own. This can take a few months.
As per the exercise, the 18-month mark is here. You’re at $2.6M in revenue with $500k in EBITDA. The business should easily sell for $1.75M.
Use that money to pay off the loan, and the seller note. And you keep $1.2M.
Looks like this:
*The above assumes that there has been no repayment of the principal debt nor the seller note. As such the actual take home will be slightly higher.
Hope this exercise helped.
Remember, at BuyAndSellABusiness.com we believe that business ownership and entrepreneurship through acquisition is a sure way to love what you do, live life on your terms and build great businesses that add value to the world and build your personal wealth.
Disclaimer: Always seek professional advice before making business and life altering decisions as each transaction is unique and circumstances will vary. See this as a general exercise and example.
Opinions expressed here by Contributors are their own.
BuyAndSellABusiness.com is also running a buyer’s workshop for those looking to purchase any small business—franchise or otherwise. It’s just 30 minutes long and completely free. You can register at our website.
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