Is This Advice on How to Buy a Business Accurate?
There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this new series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!
CapForge Founder and Owner Matt Remuzzi reacts to this creator’s suggestion on how to buy a business.
Video Transcript:
Business Advice Video:
Here’s how my daughters bought their first business and here’s how you can too. They came to me to buy a brick-and-mortar business. The business cost $150,000. Clearly, my 12 and 14-year-old didn’t have $150,000, so I structured loan documents that both my daughters signed, that they owed their dad $150,000. And as a nice dad, I didn’t charge them interest. So two locations after year one made over a quarter million dollars. So luckily for them, they were able to pay Dad back. 150,000 of that 225,000 leaving 75,000 to go into their operating account. So if you’re not my 12 and 14-year-old daughter and you have a cash flow business you can come to someone like myself or anyone else similar to me and you can proposition to borrow $150,000 against that company’s cash flow. Cause there is a demonstrated cash flow coming in. And I’m only speaking for myself but I do those types of deals all the time.
Matt’s Review:
Okay, the math doesn’t work there. If the business cost $150,000, generally, businesses sell for a multiple of their cash flow. But let’s say in this case it only was a one-time multiple, and really the business made $150,000, they were willing to sell it for $150,000. And the business in the first year made 225 I guess. If he’s saying made maybe he means profit. So they were able to pay him back, but generally in order to grow a business you have to invest. So some of the money they would have potentially paid him back was presumably invested in growing the business. So, I – this doesn’t make a ton of sense.
It also only works because a 12-year-old and a 14-year-old have all their living costs covered, right? If you go buy that business and you have to run it full time you’ve got to pay yourself something. You’ve got household bills, money you need to live on. So you wouldn’t be able to pay the loan back in a year anyway, live on nothing for a year. And it’s the whole idea that a 12-year-old old a 14-year-old are running a full-time business and making a quarter million, don’t they go to school? Like what, what’s going? I don’t know. This doesn’t make a lot of sense. Typically when you buy a business, a lot of the deals that we see, that we’ve helped with, people are using an SBA loan to buy the business, to fund the acquisition cost. And those are 10-year loans. So you have 10 years to pay back the money used to buy a business. And by having a loan stretched over 10 years that’s the only thing that keeps those payments low enough that you can afford to pay the loan and pay yourself and hopefully have a little leftover to grow the business and return your own investment in the business. So to expect to buy a business and pay the loan back in a year, it’s highly highly unlikely and highly unusual that business would be selling for a low enough price but make enough money that you could pay it all back in a year. Unless you grew it like 5X the first year you had it. So it’s a nice story but it just doesn’t make a lot of sense. And I wouldn’t go around thinking you’re gonna find somebody willing to cut you a check for $150,000 unless he’s your dad and is also gonna pay for all your living costs for that year. So seems unlikely.
