Because great small companies tend to be found in specialized niches of the economy, it’s unlikely that you’ll know much about the business until you start to investigate it. (Location 408)
Practicality and common sense go a long way in successfully managing a small firm. (Location 460)
Owners who have decided to sell their companies will often retain business brokers to help because most of these owners are first-time sellers. (Location 536)
Most searchers keep in close contact with 100 or more brokers during their search; (Location 539)
most small businesses sell for between three and five times their adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). (Location 566)
indication of interest, or IOI. The IOI is usually just a one-page letter that contains few details about the proposed transaction other than price and isn’t binding on either the buyer or the seller. (Location 569)
comfortable headset. You will also need a website that brokers, potential sellers, and investors can visit to get a sense of your professionalism. (Location 778)
In fact, we’ll explain in this chapter that you should look for what may seem to be a dull business: one that has the same customers from year to year and is growing slowly—a business that is what we call enduringly profitable. (Location 1018)
year. The essential characteristic of enduringly profitable businesses is recurring customers. (Location 1029)
Our experience, however, is that recurring customers persist even when the ownership of the business changes. Customer retention is critical for a successful transition from the existing owner to a new owner. Those recurring customers provide the foundation for a great small business. (Location 1035)
High growth means that your new customers will quickly outnumber your existing ones. (Location 1039)
Want to avoid worrying about paying college tuition for your kids? Buy a dull business. Want to work less than a dozen hours a day, seven days a week, every week, every year? (Location 1047)
Low growth doesn’t put strain on management and doesn’t require a lot of additional money. Things just move slower in an established business that is growing slowly. (Location 1049)
Both men find that just running the business is hard work, with a myriad of challenges such as hiring employees, revamping the company’s information technology systems, scheduling crews, improving the quality of their offerings, and professionalizing the business. (Location 1064)
We think it makes sense to buy a business with between $750,000 and $2.0 million in annual pretax profits. (Location 1071)
Many businesses will require its owner to be its chief salesperson. If you hate selling or are not very good at it, don’t buy a business that requires you to fill that role. (Location 1086)
The company develops systems and policies so that individual providers can be substituted when one person moves on to another position. The customer recognizes the importance of the company, and that is what makes a business more than a job. (Location 1120)
There is, of course, nothing wrong with buying a great job. But this book focuses on buying great businesses that are more than jobs because we think owning a great business is much better than having a great job. We have two reasons for thinking this is so. (Location 1132)
Avoid companies in which the owner has an essential role in the delivery of the business. (Location 1144)
irreplaceable, you might be looking at a job, not a business. Avoid businesses in which your work would be so irreplaceable that the company would be worth nothing when you decide to leave. (Location 1147)
Dull is good. We also excluded price from the shopping list. The price of the business you buy isn’t restricted to the (Location 1156)
He also thought he could manage the business and, in fact, was intrigued by rental businesses generally. (Location 1340)
keeps competitors and customers from pushing down the margin. Look for large EBITDA margins of at least 20% for manufacturing and service businesses and 15% for higher-volume businesses like wholesalers and distributors. (Location 1669)
Does this business have recurring revenues? Do the same customers purchase from the prospect again and again? In chapter 10, we looked at indirect indicators of recurring customers, but once you have access to sales records, you can check this directly. (Location 1677)
Most simply, it is accounts receivable plus inventory minus accounts payable. (Location 1843)
Typically, the seller needs to continue working with the buyer for three to six months after the purchase to help with the management transition. (Location 1855)
Part of the purchase price is also usually tied up in escrow accounts, and some of it might be in the form of an earn-out, in which the seller gets some portion of future profits. (Location 1859)
Buyers typically pay for their acquisition of a smaller firm by borrowing about two-thirds of the purchase price. (Location 2587)
Senior loans are typically limited to 30% to 50% of the total value of the business, a percentage that gives the lender a large cushion of safety. (Location 2592)
Local and regional banks are a good source of senior loans, as are nonbank lenders. (Location 2599)
Whether senior loans are based on assets or cash flow, they are codified in detailed legal documents that you will negotiate using your attorney. (Location 2635)
Second, you should structure the loan covenants and other restrictions to minimize the chances of default. (Location 2639)
Having debt is much more important than having cheap debt. (Location 2642)
Most businesses experience reversals along the way—you want to negotiate debt that gives you time to fix these normal problems. (Location 2644)
The loan plus the seller debt plus the equity you plan to raise must cover the cost of your acquisition and the associated transactions costs. (Location 2647)
the loan is too large, you’ll need to reduce the amount and increase either the seller debt or the equity. (Location 2650)
This is called a leverage ratio—for example, “Senior debt amount must be less than 2.5x the EBITDA. (Location 2670)
If the lender registers concern at your lack of confidence in your own projections on which the covenants are based, remind the lender that the purpose of a covenant isn’t to test how good a forecaster you are; it’s to make sure that the loan is very safe. (Location 2679)
even if that represents a considerable discount from your financial projection. (Location 2681)
Generally, early in the loan, your company’s profitability should be able to drop at least 15% to 25% before hitting a covenant. (Location 2682)
It’s a good idea to try to negotiate smaller amortization payments in the early years of the loan; if your business generates lots of cash, you can always prepay some of the loan. (Location 2697)
A conventional lender will often require a personal guarantee if you own the majority of equity in the company, but the lender is likely to exempt you if investors own the majority. (Location 2707)
There are rarely personal guarantees associated with seller debt. (Location 2732)
there are two protective provisions that the seller may request: If you refinance the senior debt while the seller note is still outstanding, you cannot increase the amount of the new senior loan above the amount of the old one. (Location 2734)
half the increase must be used to prepay the seller debt. (Location 2736)
Often, however, the cost of the agreement is that the equity investors agree to delay any payouts until the seller note is paid back. (Location 2743)
First, you want to introduce yourself to all your managers and employees and reassure them that they aren’t going to see any immediate changes. (Location 2991)
It is also an opportunity for the staff to ask you questions and begin to build confidence in you. (Location 2995)
everyone focused on their work. Third, take control of the cash. The most common reason smaller firms run into trouble is that they run out of cash. (Location 3004)
To track your cash flow, set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. (Location 3006)
Every month, you forecast cash receipts and expenditures for the upcoming three months. (Location 3008)