It was suggested that I cross post my blog here into Searchfunder. Since I find Searchfunder to be a tremendous resource, and don't want to get banned, I am not posting my first blog post here. If you want to read you can here: jordannovgrod.substack.com/introduction

So here is the second post.

Because the small business market is so fragmented, it both presents opportunity, and makes it difficult to source a deal. While several books on the subject have been written, and several universities are now teaching classes on the process. It still does not have the kind of processes, knowledge, and support as say buying a home does.

My process is going to be loosely based on what I have read in the books mentioned in my introduction post, and I am going to adapt as necessary as I move along.

I think it's fair to say that defining what type of business, it’s location, and level of earnings I am looking for is a good place to start.

Location:

Some knowns for me are location. Ideally, finding a business within commutable distance from my current home in Hedgesville, WV would be ideal, but probably impractical. So location wise I am planning to look throughout the Southeastern US.

Type:

Type of businesses can be broadly broken into 4 categories: Manufacturing, Distribution, Retail, and Services.

Manufacturing usually requires heavy expenditures on expensive machinery, and thus can be quite a gamble unless you have industry specific experience. Since I don’t have that experience, and don’t like gambling, it’s off the list.

Distribution is all about logistics, and while there is definitely room for improvements in this area, many of the businesses probably implemented such improvements. Because I want to grow the business I buy, this could make finding a business in this category more difficult.

Retail is having a really hard time right now because of the government's responses to COVID-19 and thus there is definitely potential to buy a good deal assuming that government stops the insanity. This is all well outside my control so another gamble and so I am not looking for retail.

That leaves services as the category that I am going to be searching for a business to buy. Service business have a few advantages and a few challenges. First, they can not be outsourced, and thus little competition from cheap labor overseas. Second, they usually sell on the lower end of compared to their cashflow. Most small businesses sell between 1x annual cashflow/seller discretionary earnings and 5x annual cashflow. Service businesses generally sell for 1-3x. Lastly, and probably most importantly, the competition is generally not that difficult to compete with. My experience is most of these businesses have terrible business practices, things like not showing up when they said they would, not doing a good job, not making it easy to pay in installments, not communicating, etc. The challenges as I see it with most service businesses is getting good employees, especially right now with a shortage of skilled tradesmen.

Earnings

So in the introduction, I talked about a Kitchen and bath remodeling company. This company listed for $650K Link to the one mentioned. Its cashflow is listed as $339,334. So in essence, if I had $650K to buy it, I could make that back in less than 2 years. Now you are probably thinking who has $650K they can spend, well not me, but the Small Business Administration has loan programs where you can purchase it with as little as 10% down. After closing costs and fees for due diligence, the load would probably be in the $750K range. So in this instance that means only $75K. Seems too good to be true, right? Here’s where the details really matter. First, if you get a 90% loan and assuming you are paying 6% interest, the loan servicing cost is rough 100K per year with a 10-year loan. Now that $340K of cashflow is cut down to $240K, and once you pay taxes, you are down to roughly $130K of potential earnings. Seeing as I have living expenses for my family, that would mean not only would I be making less than working a job, but I would have no money to invest in the business. Ultimately I think that this is too low of annual earnings to justify the risk, work, and to grow a company. So my calculations point to looking for a company generating more than $750K in cashflow.

Current Criteria

Location: Southeastern United States with a few carve outs Type of business: Service Seller Discretionary Earnings/EBITDA: $750K to $3M So roughly selling for between $1.5M and $9M Which requires roughly between $150K and $900K in down payment

Please comment below if you think I have something wrong, I am missing anything, want to know more, etc.