Buy a Small Business Fast

Buy A Small Business FAST

The Small Business Buyer Page 1

Buy A Small Business

FAST

The Bootstrap Blueprint



Table of Contents

Introduction.......................................................5

The Why and What of Buying a Business.........9

OK! So Show Me The Money..........................14

Getting Money For The Deal...........................16

The Search........................................................20

First Contact: Getting In The Door...................24

Meeting With The Seller...................................27

Finishing The Process: Making The Deal.........30

The Offer Part I..................................................31

The Offer Part II.................................................35

The Closing.........................................................39

Summing Up........................................................44



Income and Liability Disclaimers

Every effort has been made by the author to ensure that the

information and advice contained herein is accurate. However, all

types of business endeavors entails significant risk which the reader

must be willing to assume when implementing the following

strategies.

You, the reader, assume all risks associated with using the advice and

strategies offered, and you understand that you are solely responsible

for any and all results that may occur from putting this information

into action in any way, regardless of your interpretation of the advice.

You further agree that our company cannot be held responsible in any

way for the success or failure of your business as a result of the

information presented below. It is your responsibility to conduct your

own due diligence regarding the safe and successful operation of your

business if you intend to apply any of our information in any way to

your business operations.

This document contains business strategies and other business advice

that, regardless of my own results and experience, may not produce

the same results (or any results) for you. I make absolutely no

guarantee, expressed or implied, that by following the advice below

you will buy a company or make money or in any way improve your

business operations.



Results will depend on the nature of the business, the conditions of the

marketplace, the experience of the individual, and situations and

elements that are beyond your control. As with any business endeavor,

you assume all risk related to investment and money based on your

own discretion and at your own potential expense.

You are given a non-transferable, “personal use” license to this

product. You cannot distribute it or share it with other individuals.

Also, there are no resale rights or private label rights granted when

purchasing this document. It is for your own personal use only.



Introduction

Thank you for purchasing this product. I have endeavored to make

this a concise blueprint of the entire buying process. In doing so I

have created the shortest possible shortcut that anyone could take to

achieving the goal. One of the key problems people have in buying a

business is the length of time it can take to get to the finish line. It

simply doesn't have to be that way.

I am a big believer that genius is simplicity. That is why I try to boil

everything down to lowest common denominator and using the

simplest possible logic. Buying a business is an easily

overcomplicated process.

If you read any books or articles on how to buy businesses you will

find overly detailed rhetoric which looks at every angle and makes a

career out of verbosity. Moreover, you will find that buying

businesses can be made into an academic exercise or a technical mess.

Whatever thousand page monstrosity you intend to read on this

subject, don't bother. This will get you there faster and without the

incredible headache of becoming an MBA or CPA.

However, in order to get to that finish line you have to be willing to

stretch yourself in certain ways. You need to stretch your experience

level, stretch your wallet, stretch your contacts and stretch your offers.

While buying a substantial business is not easy, I will show you how

to leverage your assets and capabilities to get you underway so that

you don't have to waste your career to get a career.



In this document we deal with leveraged buyouts and boot strap deals.

A leveraged buyout is the process of buying a company using its own

assets as collateral for the purchase loan(s). A bootstrap deal is slang

for doing a deal when you have hardly any resources (usually money).

The two concepts together, done properly can make the average

person an owner of a substantial company.

One can definitely use this course as a guide for his/her first

acquisition, but there will be questions and other things you will need

to learn. But this what you need to know to get a fast start and this is

how it is done by a professional who has done it.

This is the right time to be buying a business. The economy stinks,

everyone is out of a job and if you were ever going to go out on your

own then now is the time. But even better than that the prices of

businesses are depressed and many good income streams can be

picked up for a fraction of what was possible during the good times.

If you have ever thought about buying a business these pages will

show you what it's all about. If you don't know where to start, or just

need additional primer then this is the right place to be.

We'll show you the tricks of the trade. How you can do a lot with a

little money, how you can look good doing it and how you can

immediately set yourself in motion for success.

Who am I? Well, my name is Rockwell Marsh I am a former

commercial and investment banker and product of the 1980's

leveraged buyout boom. I started a number of ventures to acquire all

different types of companies using LBO techniques. I have bought

and owned manufacturing, distribution and even construction



companies. I have bought tiny companies under $1.0 Million on up to

those with $30 Million in sales.

And before I learned how to do all this I spent many hours, days,

weeks, months and even years going out on my own and trying to put

deals together without success. Back in the day if you didn't have a

job and were striking out on your own in the finance field you were

"on the street". This is where you would visit lots of people, bankers,

brokers, buyers, borrowers and such to see if deals could be done and

half your time would be wasted on scams and bums. Part of learning

the deal process is knowing when to quit dealing with people who are

wasting your time. It is a lesson that still needs to be learned by

buyers of businesses in today's market.

But trust me on this - going through your first buyout will be the most

thrilling moment of your life (well perhaps with a couple of

exceptions). It was thrilling for me and taught me more about

business than anything else in my career. It gave me perspectives that

I could never get from working for someone else. It put me in charge

without the headache of going through startups and business

incubation and growing pains.

Why am I bothering with this teaching and coaching if I am such a big

shot dealmaker? Quite simply because success needs expansion. I can

branch out and profit in several ways. I can expand my network,

opportunities and dealmaking in areas which I have not touched on in

the past. What I realized is that it is not enough to put out a brochure

and hope the world finds me . I needed to put up interactive content

and products to make sure my stuff gets out there - just like writing a

book and becoming the expert. This subject of buying businesses and

doing LBO's in the small market needs to be taught because nobody is

teaching it and I am the guy to do it.



Furthermore I do not believe I am creating any competition for myself

(the world is full of deals that I will never see) but I do think I might

be creating potential partners and contacts, especially if people benefit

from this information. Know that as I write this sentence I just put out

an offer on a big contracting company. You should have done the

same thing.

Did the title say buy a business fast? Yes it did, but everything takes

time, effort and persistence. My first and foremost advice to you is to

when you get into this business start the process of finding a lawyer

and an accountant. You will need them at the beginning, middle and

end of the process. That doesn't mean you have to spend lots of money

up front. It just means to start the interview process and find out those

professionals who are hungry and willing to work with you.

So Let's Get on With It!



The Why and What of Buying a

Business

So let's start by understanding why we are buying a business and what

kind of business we want to buy. Why do we want to buy a business?

Here are some obvious answers:

1. Because we don't have a job

2. Because we hate the job we have.

3. Because it is too risky to start a business.

4. Because who knows how to start a business

5. Because we want to build wealth

All very good answers. But there is one big answer we are missing

here.

WE WANT CONTROL OF OUR LIFESTYLE!

Now you probably just said, "But I knew that" and you might have

thought you did. But recognizing one's lifestyle requirement isn't

really that obvious when seeking a livelihood. How you deal with

your lifestyle needs will determine which way you go right out of the

gate. It is very easy to say you will do what it takes to get a business

and work as hard as necessary. But let me assure you: you do not want

to be miserable with your new business, because you just were

miserable in your old job and this is the reason you wanted out.



When I was in the dirt looking for a job I crawled all over New York

seeking anything I could find. But it so happened that New York was

hours from my home and I would be taking a train and commuting

every day for four hours at least. Was that the right decision? Even if I

did not mind the commute it is a colossal waste of time to travel four

hours of each and every workday.

So I found an investment banking position downtown and was

already to take it when.... One day I realized that I didn't want to go to

New York even if it was good money and a prestigious position. What

I wanted was time and freedom. And Money. I wanted it all.

So what did I do? I slugged it out from opportunity to opportunity. No

not from job to job but from deal to deal. I visited companies,

networked, looked for buyouts, and eventually, even though I had to

go through my own learning curve, I got some deals done.

I didn't have to make some ridiculous commute after all.

So now I thank my lucky stars that I am home with my family when

other dads are sitting in traffic or trying to catch the next subway to

get home by 10 at night. Even watching TV is better for your mental

health that sitting in a train that much.

YOU should not have to go through the learning curve I did. This

document will save you a ton of time. And one more thing in your

favor is that the internet has made it much easier to uncover good deal

opportunities and good financing sources. When I first started out the

internet was just starting and we were all stuck with ads in the Wall

Street Journal and local papers to find our deals. It was a lot tougher

then than it is now.

OK so what kind of business are we looking for?



There are two kinds of business buyers, those who buy a job and

those who buy an investment. The difference is simple.

The first one works inside his/her own company, the second one

doesn't.

There are many ways to say this. You can be CEO or controlling

shareholder. Owner or manager. You can be pizza flipper or not.

I am here to tell you that you do not want to be working inside

the company you buy. Or at least not be required to work there out

of necessity. You want to be the investor. You want to be the guy who

owns the company .

The company you must buy has got to be able to support your lifestyle

even if you aren't there ever. Otherwise... it isn't a company, it isn't

big enough and it isn't of interest to us. Now that is not to say: do not

buy a pizza joint if you indeed know all about pizzas. That is to say:

buy the pizza joint with the general manager already hired so that you

do not have to go into the place and run it.

Now this criteria may well rule out many attractive businesses. What I

am teaching here is that the company you buy will have this

characteristic:

When you close on the deal you will be able to go to sleep for a year

and still collect your paycheck.

Forget main street storefronts, forget restaurants and yes forget even

most online businesses that are work from home affairs or do it

yourself startups. If you miss a beat in any of these companies you

lose your livelihood.

So actually we have just answered another key question, what kind of



company do we want to buy? Answer: One that's big enough so we

can be paid a full salary with benefits but do not have to be there

unless we want to be.

Now again you when you take this route you will be giving up the

following types of deal opportunities:

Small retail businesses like pizza joints, clothing stores, gas stations,

convenience stores, and most other main street mom and pop stores.

They are too small to run by themselves and pay you a salary as well.

If you want one of those businesses here is a quick primer on what to

do.

1. Contact local business brokers

2. Collect local opportunities in your area

3. Visit them

4. Decide which ones you like

5. Make offers for 2x discretionary cash flow with 1/3 down payment

6. Wait until you get one that is interested

7. Negotiate with seller until he takes back the other 2/3 in paper

8. Close deal

Simple? Yes probably too simple but I said FAST and this is indeed

the FASTEST possible closing strategy in a nutshell. I have met

brokers in the micro market which close a deal like this every month.

That means they get a lot of action on these deals. Lots of people

often opt for this type of deal even though they are stuck running

them. They are also stuck in a limited local market and nowadays

these companies are getting run out of business by their internet

counterparts.

So if the pressure is on you and you absolutely need a deal

immediately then this is your type of company. Go with my blessing

and buy one but this is not what I am teaching here.



Ok final comments on what to buy and what not to buy. I do not buy

retail stores, professional service companies, such as accounting

firms, high tech companies or companies where there is no balance

sheet.

And while there may be a place in the world for pure internet

companies we aren't doing LBO's on them because there are no assets.

So make no mistake we are doing LBO's on small market offline

industrial type companies. These have staying power, they aren't

startups, they have track records, they are bankable and they have real

money.



OK! So Show Me the Money!

So where is the money in this operation? Here is where the money is

when you own your own business:

1. Drawing a Salary - you set it, nobody else does

2. Perks, such as travel, auto, gas, repairs

3. Benefits: Health, retirement plans

4. Bonuses: You set them

5. Dividends: You set them

6. Tax benefits: The world of business tax deductions is very kind to

people

7. Capital Appreciation: You sell the business and make more money

Actually I am playing this down, but it should blow your mind. These

are but a few of the many ways you can money with your own

business. Learning how to take advantage of the many benefits of

business ownership is just one of the fun things you will learn along

the way.

Forget, for the moment, about the industry, the location, the

financials, the employees and all the other distractions. You need a

company that is big enough to not only support your cash needs but

your lifestyle as well. You need to be able to escape the business,

even if you don't want to now. Otherwise consider yourself among

the ranks of employees who are trapped in 9 to 5 jobs. If you want to

be one of those you ain't in the right place.



Now here is a reality check. Do not think for a minute that you will

pull down $1.0 Million a year in your first year. It isn't going to

happen unless you have the resources to control a much bigger deal

than the average person can afford. If you can plunk down a couple of

million in equity capital and control a $35 Million sales company

kicking off $3.0 Million in EBITDA then we can talk about the

million dollar salary.

The good news is that even a modest sized deal can get you very

comfortable. Let's say that we buy a $5 Million Company with a

$700,000 EBITDA. The numbers could easily go something like

(approximately) this for one owner and after paying debt service and

acquisition costs.

Per Year Deductible Expenses

Salary: $150,000

Car: $ 10,000

Insurance: $ 5,000

Travel $ 10,000

Bonuses $ 50,000

Retirement $ 20,000

Health: $ 25,000

Total $270,000

Not Bad? It could be more or it could be less but as you grow and

even buy additional companies this figure can keep growing.



Getting Money for the Deal

You must understand where the money is coming from ahead of time.

Let me say that again. You must know where the money is coming

from before you even put an offer out. I will help teach you how to

know how much money it will require but you must know or at least

be able to estimate how much money a deal will cost and where the

money is coming from.

Most first time buyers forget about the money and then launch their

deal search hoping that they can find the financing at the end. While

there is nothing wrong with starting the deal search immediately the

point is that you know what your purchasing power is and don't shop

for deals that are over your head.

So let's start with the assumption that it is a $2.0 Million deal and the

down payment is $1,500,000 which you don't have. So where do we

get the $1,500,000? If you don't have the answer there is an excellent

chance the deal is above your means and this can be true for many

deals that you make attempts to buy. That doesn't mean you shouldn't

attempt them but it does mean that you may need to bail out of the

deal if you can't figure the answer out in due course.

So the hypothetical answer is:

$1,000,000 is coming from a bank loan because the company has

enough collateral.



$500,000 is the investment we make which is coming from my pocket

(or perhaps a couple of partners as well).

The money to complete the deal can come from:

1. A bank or institutional loan/investment

2. An Investor/partner

3. Our own funds

4. Seller funds (paper)

We use a minimal amount of our own funds in order to keep the

deal cheap and maximize our return. The returns I have gotten from

using other people's money in doing LBO's have, at times been

astronomical, I mean off the charts.

There are times when you can actually buy muti-million dollar

companies with none of your own capital and still retain a controlling

position in the company.

So we will need to use the above components to finance any kind of

deal. Now our goal is to have the deal 100% seller financed

because seller financing is the cheapest and easiest form of

financing. Obviously this does not often happen but this is our

optimum deal structure.

We will go over the whole subject of financing in more detail

later but for now we want to point out that our target company

must be strong enough to allow for some financing in one form or

another. To get acquainted with the company's financial profile,



obtain the income statement and balance sheet for the last two or

more years.

So what kind of business are we targeting? Not too small

(under $1.0 Million in sales) and not too big (over $10 Million in

sales). That leaves a company between $1-$10 Million in sales. We

might want to concentrate on the lower half of this level say

businesses between $1-5 Million in sales.

There should be some assets. Cash, accounts receivable and inventory

are the most common liquid assets which can be used to finance

some of the purchase price. Remember we need the company to pay

an absentee salary so we have to watch the profits as well. Most of

the time the company will have to earn over $300,000 in net profit

per year for us to realize that goal.

So let's recap the financial profile of the company we need to buy.

First, it should be at least $1.0 Million in sales and possibly quite a bit

more. It should throw off at least $300,000 in net profit before taxes

and preferably quite a bit more. Then it should have some assets in

form of Cash, Accounts Receivable, Inventory or other assets

including equipment or real estate.

On top of that there should not be much in the way of bank or interest

bearing debt on the balance sheet. Any significant amount of debt gets

in way of a deal. Why? Because money from a sale that would

otherwise go to the seller instead goes to discharge debt, making the

deal more expensive for both parties.

Ok, now we are ready to start the company search. Let's start by

heading over to bizbuysell.com or bizquest.com and start the search.

I know some of you are wondering how hard it is to buy a business

when you are just one person and don't have the resources of a big



company or partnership where there is plenty of cash to throw at a

deal.

I am here to tell you that "bootstrap deals" as we call them

are done all the time. I have done many of them over my career. They

are deals where you don't have much money but the buyer pulls

together multiple components, bank financing, seller financing,

purchase price assets, relationships and deal terms to complete the

deal successfully.

Sure this can be done by just one person but it has to be done

carefully, so that the buyer looks and acts like a team. We'll

show you how to do that.

Bootstrap deals are for people who are desperate to exit the rat race

and refuse to work for someone else. They will learn what I am

showing you in a few short sessions by applying consistently the

principals and will start to make the buying process part of their

lifestyle.

Yes it does take work to buy a business but it is also

fun and highly rewarding position to be in. There is nothing more

satisfying than to one day be thrust into your own company with

your own CEO title and immediately collecting big paychecks, with

all the tax benefits, health care and perks to go along with it.

The key thing is to never let up. I am also here to help you shortcut

the process. Losing control of your time can always be a problem

when going through the buying process. But we will deal with the

fixes of this problem in a later lesson.



The Search

In the previous lesson we learned the approximate size of

the company we want to buy. We also know that the company needs

to have a decent balance sheet. Meaning it should have bankable

assets. However, we did not specify what industry the company is

in.

There will be guru's out there who will tell you that you need

to know what industry you want to buy in. They will tell you that

if you are an accountant, you will need to buy an accounting business.

I can say from hard experience that there is nothing more difficult

than to try to buy a company by focusing your search on one trade

and one trade alone. This is why people don't buy businesses,

because they are looking for the "perfect business" in the one area

in which they have their primary experience.

There is no such thing as the perfect business. All businesses have

flaws but the good ones make money anyway.

You are going to have to leave your professional experience behind.

I was a banker, do you think I was running around looking for a bank

to buy? The answer to that is yes, for a while I was looking for

a small finance company to buy. Bad idea. While that was maybe one

possibility I was ignoring all the great businesses out there that

presented much better opportunities.



Was being a banker helpful? No. Being a banker gave me a very slim

advantage in knowing how to shop for bank financing, but that's about

it.

People with some hands on middle management experience had much

more of a head start than I did. I have never managed anything when I

started out.

So we are going to focus our search on the financial criteria only

not on industry for now. Later, we will rule out those deals which

appear to have industry problems.

Whether this is out of context or not I want to mention the following

before I forget. DO NOT GET ATTACHED TO ANY ONE DEAL.

You need to be prepared to walk away from a deal at any moment in

the process.

Before the internet a business search was conducted by obtaining

lists of businesses, their sales levels, geography and contacting

the business by regular mail. The response rate was excellent

because you weren't selling anything.

Today nothing has changed. You can still obtain a list of businesses,

send out letters and now you can contact them either by regular mail

or by mass e-mail. Both techniques work. Up to a point.

The problem is you will get plenty of leads but they are not what I call

"incubated". This means that this method tends to uncover owners

who haven't even thought about selling their business.

So essentially they are mostly unqualified buyers. The good news

is they will not have been "shopped". That is, they are not dealing

with a broker so you are the only potential buyer and have no

competition.

However, I would not recommend this process to new buyers, mainly



because it will waste your time. The faster method initially is to

seek out brokers and identify the older more overlooked deals.

So now we fast forward to the internet databases. Bizbuysell.com,

Bizquest.com Mergerplace.com, Mergernetwork.com are a few of the

new breed of databases which track buying opportunities from all over

the country. These are mostly brokered deals. That is good. We need

to start with an education and we will get that from the brokers.

Bizbuysell.com has the simplest possible profile on each company.

Too simple in fact. For company info it only has price, cash flow and

Sales. Fortunately that is just enough to see if we are interested. Add

to that the location and we can narrow down about ten to fifteen deals

we want to start out with.

We want to start out by targeting small manufacturing or distribution

companies. Armed with our minimum sales level we should be able to

generate some leads of companies with well over $1.0 Million. You

will note that there are far more deals with under $1.0 sales and so

you sometimes need to expand the criteria to make sure you get

enough deals to work on.

From ten leads you will quickly eliminate most of them.

Remember they should be making good money. At least $200-

$300,000. Even this amount can get you a salary of $50-$100,000 on

day one. If you have a healthy bank account or have partners behind

you I would recommend a minimum cash flow of $500,000.

The deals should be within driving distance of your home town so that

you can visit the company and possibly the broker as well. I am from

the Northeast and I tell the world that I do deals in the Northeast,

that is a maximum driving time of five hours. I have driven as much

as ten hours to see a deal but I would not recommend it. Don't

worry we are not going to jump in the car just yet.



Ok so now we have a list of deals that look interesting from a

numbers perspective. We are arming ourselves with a basic 10-20 lead

list of companies that we think are interesting and want to pursue

further.

We do not assume we are going to buy all of these companies or even

one of them. We do not go into this process thinking that. We need

to take action and get into the flow and this is how we do it. Also

we do not presume we are even going to buy a manufacturing or

distribution company. We start there because we must start

somewhere and these types of companies are most suited to small

leveraged buyouts. Remember we want a company that is substantial

and can pay an investor a good salary without breaking a sweat.

It may be that we will buy an accounting practice, internet or other

service company at some point. The principles are the same across

the board but the asset rich industrial company will provide superior

banking leverage to get the maximum sized company from an

investment.

Once we break ground in dealing with the bigger companies,

switching to smaller service businesses are much easier although not

always providing the most bang for your buck.



First Contact: Getting In The Door

It is time now to reach out to the contact for each deal. Now that we

have our list of companies we will contact each one of them.

Remember we will be screening them so that we will pick companies

that we can drive to and visit. That is not to say that we will never go

out of our home state but this is where we need to start. You need to

practice the visitation to hone the interpersonal techniques.

We will first be contacting brokers most of the time via e-mail.

The database interface will always provide a contact form which will

call for a phone number and you will end up talking to the broker who

represents the seller.

The first conversation gets you in the door (or doesn't). Most small

business brokers need to make a sale so they will plug you in to

a meeting with companies from 0 to $2 million in sales. Above that

they are a bit more selective and you may need to do a bit of a dance

on the phone. Either way you need to provide some background on

yourself over the phone to the broker.

Realize that while being straightforward and honest is the best

approach, you are always going to be hyping yourself a little to

put the best spin forward. Describe your background, your reason for

interest in this business and your capability to pull off the deal.

The last point is the stickiest and is where you will construct a

decent story.



First however, ask yourself and provide answers as to why you are

interested in this particular business. While you may not have any

experience in it there are always positive factors to any business

which you can play back to the broker and seller which show your

interest level is genuine. It usually unnecessary to have experience

in the industry to buy a business and the sellers will be the first

to agree.

Many times you may not have the money or resources to pull of the

deal at the advertised price. However, the ultimate purchase price is

often a fraction of the advertised price. The truth is you plan to pay a

lot less and you may well be able to afford it.

When asked about your capital resources you will always want to talk

in terms of the money you can arrange rather than the money you

have personally. You have other resources besides yourself. You have

family, friends, business associates and potential partners that

all count towards your capital resources. Granted they may never

be used but this is all part of your story. It is easy to get by

the broker qualification process once he realizes you are part of a

team rather than a solo player.

Always volunteer your background up front, don't dodge and duck

waiting for the broker to ask the wrong questions. It always goes

smoothly when you jump right in and start the ball rolling. Give the

quick one minute pitch of your story. Once you are done with your

story it is your turn to look good by asking the right questions.

Ask the broker the following questions:

1. Why is the seller selling the business?

2. Does the broker have a writeup on business

3. Please send disclosure statement to sign

4. Please send 2year of financials



5. How many employees

6. Summary of what the company does.

No need to get into any numbers yet. You want some preliminary

info and then you want the meeting.

You will wait and review the information. We will jump ahead

here and figure that the info you receive is satisfactory for now and

you are ready to see the seller.



Meeting with the Seller

There are multiple reasons to meet with a seller. The biggest reason

is to gain experience. You need that experience ASAP. It is what

gives you the confidence to complete a deal.

So when you have an opportunity to meet a seller, even in a deal you

don't like, take it. Don't pass it up. You will gain insight into the

seller's thinking process. You will get to know and gradually

understand the inner workings of various businesses. You will gain

new dimensions from different perspectives which will enhance your

businesses background. It will make you more worldly. And most of

all, it is exciting.

Yes meeting with business owners is exciting and should be viewed as

an important life experience. Sure, these are small businesses, but

over time you will meet with bigger businesses and the people you see

will be all the more interesting.

There are three parts to a meeting with a seller. And they are really

quite simple.

1. The opening

2. The Tour

3. The closing

The opening is a casual discussion of get acquainted banter which

leads to the two parties telling the other about themselves. As I



said in the last lesson I tend to always jump in first with my

background. Never be timid or shy about your background. As you

get used to talking about your background your pitch will become

smoother.

This is the HARDEST part of the meeting. The broker will be

there with the seller assessing whether you are capable of putting a

deal together to buy the company.

On top of that they will be assessing your ability to run the company.

Your objective here is to look polished and professional. You do not

need a ton of experience. I always indicate my lack of knowledge in

the industry but point up my other strengths and reiterate my drive

and desire to do a deal. The seller is looking for someone who not

only can buy the company but take care of his employees and

customers once he/she is gone. You will look good if you just be

yourself and answer questions in a truthful and straightforward

manner.

Once you have pitched the seller on your background, the Tour starts.

This is where you invite the seller to educate you on the business

itself. It can start with the Seller providing comments on the

business history and current status. At the same time you can ask

all the pertinent questions about customers, employees, financial

condition and industry. This is an easy process as it just has you

sitting back and taking notes for a good while.

Then you will ask for a physical tour of the premises. This may take

one minute or it could take an hour. It depends on how big the facility

is. In some cases there is not much to see. But even a quick spin

around the office is desirable. You should ask the seller as many

questions as you can during this event. This is where you get to

learn much of the business from the ground up.



Finally you sit back down after the tour and wrap the meeting up.

There is no need to discuss price or terms at this point - it is just a first

meeting. At this juncture I describe my next steps to the Seller.

Usually this means that I ask for any follow up documents and I then

would contact the broker to discuss where I stand on the deal. Laying

out your next steps is important to make it appear that you have a

team and a procedure to follow. Your next step might be, for example,

to have your financial people (i.e. your accountant or even a friend)

analyze the deal.

That's it. Hopefully the meeting went well and the seller

feels at ease with your style and capabilities. Similarly, you must

feel comfortable with the seller. I have shut down many deals

instantly because I do not like the seller. You will be working closely

with this person and you must feel good about dealing with him/her.

You can now shake hands after a good first meeting and move to the

next step.



The Offer Part I

Before we get to developing the offer let's talk about what we do up

until we get to the offer. We will generally not need a second meeting

as we will follow up by obtaining financials and any other background

info from the broker via e-mail. For the sake of time we need to

streamline the buying process by cutting out the fat. We aren't doing a

lot of meetings, we aren't collecting a ton of information, we don't

need to take a lot of time before throwing out a NON-BINDING offer.

Yes non-binding because if we make a mistake we need to be able to

back out with no penalty.

So we jump straight in to the analysis to get our offer.

Before making an offer we should have the following information

(bare minimum):

1. Two years of income statement and balance sheets minimum

2. The same two years of reconstructed profit detail (see below)

3. A broker memorandum describing history and operations

4. A projection of next year's revenue and income.

While we can ask for a whole lot more information these are the

bare necessities for making an offer. We need to know the historical

reconstructed profit, the assets being delivered and the prospective

reconstructed profit.

We can also ask ourselves a whole list of more subjective questions

having to do with management, industry, how good the fit is etc. But

when it comes to the offer, the numbers dictate the deal. The most

important number we need is the reconstructed profit. The

reconstructed profit is the reported profit by the accountant adjusted



by any "addbacks". An addback is usually an expense that is

unnecessary to the business, such as renting a condo in the Bahamas.

Thus you simply add such expenses back to get a better picture of the

company's earning power. In most businesses there is a lot of money

to add back because owners often take plenty of perks and spend

money on things the new owner would not have to pay.

Incidentally, the term "reconstructed profit" comes in many varieties

such as "discretionary income" "normalized profit" and so on. Brokers

have their own way of calculating these numbers. Brokers will almost

always be the ones to provide you with the addbacks and RP. Note

that the broker will always pump these numbers up and thereby

market you a more expensive company.

It is your job to hammer these addbacks down. I have never seen a set

of addbacks that couldn't be negotiated down by 30% or more. This

will make a huge difference in your offer. It can easily mean the

difference between a $2.0 Million asking price versus a $1.0 Million

offer.

In any event this issue does not have to be addressed up front. It's

just a matter of incorporating the lower RP into your offer.

Armed with a hammered down RP we can now jump to the valuation.

I could spend a whole seminar talking about valuation. Valuation can

be a complicated science. My big secret to teach you is that you can

throw all the valuation science into the garbage. It is of no use to

you as a business buyer. A formal valuation can indeed be of use to

the seller for a number of reasons including justifying an extreme

asking price. However, you, the buyer only need a few basic concepts

to make an offer on a business.



The Offer Part II

The next thing to do is develop a purchase price. The simplest way

in the world to value a company is the rule of thumb multiple method.

We take the reconstructed profit(RP) for the most recent year and we

apply a multiple, say 3-5 times profit, and arrive at a purchase price.

Now if you look at Inc magazine or read any of the valuation articles

out there they will have many methods, some based on sales, some

based on net worth and some based on profits, often computed a

dozen different ways. There could be a different valuation model for

each industry.

I am here to tell you that it's all rubbish. You do not need 50 different

valuation techniques. If an industry requires a specialized valuation

method then you probably have the wrong industry.

Every deal can and should be valued based on the rule of thumb

multiple. The reason is simple. The lower the multiple you pay, the

less down payment you need and the higher ROI (return on

investment) you receive.

So let's take a look at this. For example a 3x multiple would mean

a company with a RP of $500,000 would be worth $1.5 Million as a

valuation. At 4x a $250,000 RP company would be worth $1.0

Million.

Most companies at our level have asking prices somewhere in the 3-

5x range. The bigger the company the higher the multiple. Larger

companies will be priced as high as 8x-10x sometimes. We stay away

from those companies because they take a lot of capital to buy.



Our objective is to put together an offer for the low end of that 3-5

range of multiples. Asking prices are generally at the high end of the

range. We never want to pay at the high end for several reasons. For

one thing companies are rarely worth anywhere near their asking

prices especially lower middle market companies in the $0-$5.0

Million sales range.

You should proceed to pick a very low multiple say 2x and construct

your offer around that price. For example for the $500,000 deal you

would start your offer around $1.0 Million. Some folks will be afraid

of starting that low. But this is the method I use to determine if a

seller is motivated. I don't need nor expect a seller to accept my

first offer. But if I am still in a discussion with him after he has

seen my lowest bid then there is a good chance he/she is motivated.

The offer must be broken down into its three basic components:

1) cash 2. financing and 3) seller paper. Cash being the cash we must

invest to do the deal. This number must start out at zero. That doesn't

mean we will not put up any money but it means we construct the

offer based on a zero down payment at the outset.

We will always attempt to finance 100% of the price even if the deal

doesn't end up that way. For example a $1.0 Million price may be

structured as $500,000 bank financing and $500,000 seller paper. This

may be realistic for us to put together and if so we should make the

offer.

Then two things can happen: 1) the seller says no or 2)the seller says

yes. If the seller says no and we still want the deal we can inch the

price up to where it is reasonable. If the seller says yes, we only

have the bank financing to contend with. In either case there is a good

chance that we will be asked to come up with some down payment

money.



However, the fact that our offer and ultimate agreed price is very low

will serve to minimize any cash outlay on our part. The only

drawback to getting the best price and minimizing the cash outlay is it

requires some persistence to get to the motivated sellers who wish to

exit at a below market price. However, it is important to remember we

can always come up in price during negotiations to speed the process.

We can almost never go down in price.

So to recap, the valuation should be as low as possible, 2-2.5x

multiple of RP. The structure should contain enough seller paper and

bank or other financing to reduce the invested down payment to zero

or close to it.

We then need to look at enough deals to put out several offers per

month. Once you have been at this for a month or two deal flow will

start to increase and you will have enough companies to bid on. Once

you go through the process a few times you will start to get bites from

interested sellers and viable deals will start to present themselves.



Finishing The process: Making The

Deal.

An Agreement in Principal

We are now armed with a quick deal structure and price. In summary

we have now picked a price of 2-2.5 times RP. We have also put

together a simple structure of how it is financed. Say 1/3 cash and 2/3

seller paper. Behind the scenes we know that we will finance say 50%

or more of that cash down payment with a bank. We do not expect

that the seller will jump at the first offer but the important point is that

the seller remain in the negotiations. We may end up at 1/2 cash and

1/2 seller paper, if we like the deal.

We will never ever pay all cash. Small businesses simply present way

too much risk to the buyer to be doing all cash deals. The next step

is to structure the terms of the seller paper. I usually start at 8

years. In other words the paper can be paid over 8 years in equal

installments. Many sellers will think this is two long and will want

to be paid over 1-3 years. We can write a book on why this is too

short and too risky for the buyer. One can settle somewhere in

between and still do well.

Essentially this completes the deal terms we will need to present to

the seller. We need the price, cash down, seller paper and terms. We

have skipped a few assumptions here for illustration. For example we

assume that the cash flow will be sufficient to discharge the seller

notes as they come due. This is a financial exercise that is the subject

of another discussion. Suffice it to say that we have priced the deal

low enough to provide a significant cash flow cushion with which to

pay debt.



We now reduce the deal terms to writing. This can be in the form of a

very brief non-binding letter of intent. There are many examples of

these letters on the internet. You should pick the shortest one. There

should be just enough in the letter to indicate that you know what

you are doing.

You need to set for the deal terms in bullet points

and make sure that there are appropriate disclaimers and indications

that you are not making an offer but rather and indication of interest.

Offers can be binding, non-binding letters are not.

Negotiations

Again, books are written on negotiations. The best time saving tip

I can offer up front is that there are many tell tale signs that the

seller will not play ball. Recognize them quick and move on fast to

the next deal. The personality of the seller will make or break the

deal. They must be easy to work with and down to earth. They must

have reasonable expectations for the sale.

If they reject your first offer out of hand indicating it is insulting, then

move on. You will know when it is time to quit. But too many people

hang in too long with an unrealistic seller and waste a ton of time. It is

easy to come to a deal once you have found a seller with the right

attitude.

The final deal you arrive at may well look like you are overpaying.

For example you may decide to pay as much as 5x RP because it is

still a good deal. However, you will be negotiating hard on the cash

down payment and giving ground on the seller paper and other terms.

So the deal may result in a higher purchase price in exchange for

the very favorable low cash down payment. This is your objective.



The low cash down payment is your one critical term which you must

have to complete the deal. Give anything else but don't give on this

term.

In a matter of a few weeks and after several discussions, first with

the broker and then with the seller, you should be at the point of

making or breaking the deal. You will be communicating your offers

through the broker so it becomes a little easier than trying to grapple

directly with the seller.

If your first offer is rejected, and it will be, request a counteroffer.

Usually a successful deal is the culmination of a few rounds of offers

from both sides. This can be a somewhat painless process, because the

broker buffers most of the stress that the parties might feel.

You will be nervous about every deal because it is an unknown

commodity. Know that your way out is your letter of intent. It is non-

binding and anyone can walk from it. It is a means to get to the final

price and terms of the deal, nothing more. Once you have gone

through several rounds of offers and counteroffers via the letter of

intent, you will know whether a deal can be done.

Either the seller has allowed a deal which you can finance or he hasn't.

Usually on the first counter from the seller we find whether the deal

will fly. He could be way off from our original offer or he might be

pretty close.

If the seller doesn't try to change the offer completely and tries to

put together a reasonable counter which is not too far astray we might

have a very good chance of coming to an agreement. Three or four

rounds with this process can get us an agreement in principal aka a

signed letter of intent. The letter of intent will be modified and

tweaked along the way but when everyone is comfortable with it the



final product should be signed by both parties even though it is non-

binding.



The Closing

We are almost done now with our deal process. You can practice the

deal structuring process over and over again without ever closing a

deal. However, when you get to the closing phase of the deal you

don't want to be practicing - you want to get to a successful closing

the first time around. Sometimes this can be easy sometimes this can

be very difficult.

Consider this. You have $100,000 ready to invest and you have

structured a $300,000 deal with one third down and the rest over five

years. You can probably close this deal in a month without any

problem and no need to run out and find bank or third party financing.

This is relatively easy. But this may not be the best use of your

money. This deal may generate as much as $150,000 in RP which

may be enough to pay you a decent salary while you are managing the

company.

Now consider an alternative. You have the same $100,000 ready to

invest.

But now you have structured a $1,000,000 deal. The seller has agreed

to take back $500,000 in paper payable over the same number of

years.

You need to raise $400,000 (yes there are some other closing costs but

we can put them aside for the moment). The deal throws off $4-

$500,000 in RP and this can easily pay your salary while you aren't

even working the company - and still have money left over to to pay

the seller financing.



Again the seller takes back paper but this time he has balked at one

third down. Instead he takes back 60% of the purchase price or

$600,000. This leaves $400,000 as the down payment and $300,000

left to raise after your $100,000 investment. This deal is harder to

close but is a more effective use of your money and buys a more

substantial company.

Let's work with this second deal as our closing example.

We have just negotiated hard to get to this point. We have gotten the

seller to agree to sell us his company for about 2-3 times RP with

the down payment not even one times RP. This could very likely be a

home run. The only thing in the way is the $300,000 cash needed to

close.

First let me say that I have many times been in this situation, needing

a large amount to close, and not known where the money is coming

from.

If you have structured your non-binding letter of intent correctly

you will not lose any money just because you could not close the deal.

You will often be in the situation of putting a very attractive

deal together with very little money down and STILL not knowing

where the rest of the money will come from. This is the home stretch

and will separate the deal closers from the spectators. This is where

you take the ball and run with it.

What do you do? The seller and his advisors will be skeptical and will

not wait forever to close so you need to buy yourself some time.

Usually sixty days is enough to arrange small financing. You will

have set forth this time frame in the letter of intent and made it clear

to the seller.



After sixty days everyone can walk. But this will give you enough

time to arrange the financing. Even if you take 61 days to get bank

approvals a motivated seller will not hold you to it. As long as the

financing approvals are in place you are good to go.

During the sixty days you charge ahead on all fronts to raise the

money.

Almost always there is a certain amount that can be raised from a

bank or finance company using the company assets. Sometimes this is

enough to close the deal. Sometimes it isn't. Let's say you can borrow

$250,000 from a bank using $300,000 in Accounts Receivable,

$100,000 in inventory and $100,000 in net fixed assets all owned by

the company. This is a realistic scenario but you still have $50,000 left

to raise. Maybe even$100,000.

Where do you get it? The fascinating thing about the deal business is

the creativity that emerges from necessity in these situations. There

are usually multiple answers to this question ranging from borrowing

from close associates, to taking on a partner, to making still another

deal with the seller. When filling the (cash) gap, the solution so

often just presents itself. If you have to have the deal you will find

a way.

One time tested trick is to agree with the seller to pay this gap amount

over a very short period of time after closing and add some extra

protection or collateral to the package. The RP of the deal usually

supports this payout and it is simply a matter of getting the parties

to agree.

OK let's jump ahead now. You have raised the money needed to close

the deal. It was tough but you wrestled some money out of a bank and

made still another side deal with the seller to defer a portion of the

down payment until after the closing and you were able to get a little



money out of a third party investor or friend. This is the worst case

scenario - it usually doesn't take five sources of money to close the

deal.

So you are ready with the money. In the mean time you have gotten

a lawyer to draw up a purchase contract and started the closing

process. The purchase contract should not be a big obstacle in the deal

if the letter of intent included the important points. Depending on the

lawyers, however, the closing process can be easy or very hard.

Usually the bank will have its own paperwork and its own lawyer as

well. It is important to get a deal friendly lawyer to work the other

parties.

Once you have gotten this far you do not want the purchase contract

or the lawyers to mess it up.

Remember, the seller is getting a paycheck, and you aren't. Negotiate

hard up until the closing but once you have the money lined up its

time to stop playing hardball and close the deal.

By now you will have worried stiff about the seller's intentions. You

do not know whether the seller will hang on long enough to get

through the financing and closing. This is the most stressful part of the

deal process. After all the seller could instead be negotiating with

somebody with more resources than you! This is not the time to panic.

The seller has made a significant time investment in you and willing

buyers do not come along every day. This is why you need to

carefully select your seller and be very comfortable in your

relationship.



Once the lawyers have set a closing date you and the seller are ready.

A ton of paperwork is exchanged and money changes hands along

with the title to the business. You can go to the lawyers office to close

along with the other parties. This is one last event that wraps the

deal up. At this event there is no negotiation, or even any need to

say anything. It's all done by now.

Time to celebrate



Summing Up.

The basic picture should

be clear - here is a checklist:

1. Define your resources and capabilities

What kind of business?

How big of a company?

What role will you play?

Can you stay in the game for a long period?

2. Start networking and finding deals

Brokers

Websites

3. Make Contact

Brokers

Owners

4. Set Meetings, Collect Information

Visit at least 25 Sellers

Ask for key information

5. Make Offers

Do quick valuation on each deal

Structure deals on paper

Write letters of intent

Make 1 offer per week



6. Start Negotiations

Talk with multiple sellers

Second visit if necessary

Review counteroffers

7. Select Best Companies

Review Financial Statements

Assess seller for motivation

Review industry

8. Eliminate Poor Candidates

Difficult sellers

Poor Financials

Big Disagreement on price and Structure

9. Agreement in Principal

Price agreement with low multiple

Structure agreement with low down payment

Assess viability of financing

Signed letter of intent

10. Closing

Engage lawyer - start purchase contract

Line up money

Due diligence - accountant if necessary

Set closing date

Above all remember this piece of advice:

Persistence

Persistence

Persistence



As one who has been on both sides of the street (before closing and

after). After closing is much better. You have won. You are set for

life. You will always know how to close a deal. You will be the only

one on your block that owns a company. You will set your own

salary, your own hours, your own lifestyle. Believe me its worth it.

Note that you still have MANAGE your company but that is a subject

for another day.

I hope you have enjoyed this course on buying businesses via

leveraged buyouts. Naturally there is much more to learn but this

should give you the basic nuts and bolts of business buying in the

most efficient way. Start now, contact brokers, visit companies and

start moving. There is nothing to be lost by starting the process.

Here's wishing you the best year ever.

Cheers

Rockwell Marsh CEO

Signal Hill Holdings, LLC

Documents

Buy a Small Business Fast