All these businesses for sale claim 20% to 50% cash flow relative to their asking prices. What is missing? Significant capital expenses every few years?
Most of these businesses are businesses where the proprietor more or less “is the business” and is required to put in significant hours. So the cash flow includes your own time. In addition, these businesses, kind of like a small several person consulting shop lose a lot of the viability when the original proprietor leaves. My Dad operates a company like that. With him the financials look great, without him probably not so much.
This is very true. Much of it is optimistic accounting.
It also full of people trying to capitalize on a flash in the pan. They will show one good year and claim those margins are sustainable, thus should command the multiple they’re asking.
There is this guy who is making 25%+ returns in the private market investing in small businesses. If you are interested Ohai, I think this is a very interesting hour lesson on the types of businesses he looks for and immediately excludes (I immediately looked to see if I could get a job at the company ha ha). A lot of the stuff you find on the internet is purchasing a job and not sustainable for a ‘passively’ owned business.
Thanks. I wouldn’t be surprised if the returns were 20%+ for this kind of thing, to be honest, due to the high risk and the likelihood that owners are using those returns for living expenses (which would be why the businesses don’t just expand to huge scale over time). But I think coming from another career like finance, the scenario is different if you already have capital to deploy. I don’t think there are many home runs here, but the point is just to make the highest, most stable and diversified income using your existing assets.
That’s good if the market will accept the transition. My wife is in the middle of a similar process and I honestly don’t know if it will be a successful transition. She’s been there for a long time, learned the business from the bottom up and now has her own clients, but it’s still tough to gauge what will happen when her dad retires.
Did you guys consider bringing in a top level person to run the business and keeping your family members in an oversight role? I thought that may be a good way to go.
My cousin bought a pizza parlor/beer/sports bar through a business broker like this. Where he had trouble was with the various city permitting processes when he needed to do stuff with the kitchen, and with employees. He said it was a major PITA to find a good manager and employees, including employees who wouldn’t skim off the top. It ultimately didn’t work out. So he bought a 7-11 through the same means. Sample of one, but I also found these small business sales interesting.
I think you’d want to look at the tax returns pretty closely. That may give a nice view in addition to financial statements.