So how does one succeed with a strategy based on acquisitions? Keep in mind that we are talking about the acquisition of smaller companies and not $500 Million or Billion dollar ones.
One of the biggest fears that people have is that it’s too complicated in terms of the number-crunching. You have to be a math genius or at least have an MBA in finance, or so goes the myth. Is it true? Lets take a look using a simplified example.
This is basically how the math works when distilled down to its essence. Suppose you’re looking at a business with one million in net revenue for the year and a total of $250K left over after all costs, expenses, interest charges, and taxes have been paid. You then talk to financing sources and learn that your total financing costs would be $150k per annum for three years at which point you would own the business free and clear. We now deduct this $150k from the $250k leaving $100k on an annual basis. At this point, it’s your call as to whether or not you buy it. However, the smart ones would most likely jump on such a deal because that last $100K serves as a nice comfortable buffer in the event there is a slow month.
So that’s how the math works using a highly simplified example. Most people will have a professional accountant double check the numbers for them before committing to the acquisition.
In the Playbook’s deeply detailed financing section you learn how to do this yourself as well as how to chisel away at both the asking price and down-payment. For those with an interest in finance you’ll end up with a Kirk Kerkorian/James Ling level of acquisition finance know-how.
Don’t let a childhood fear of math scare you off from pursuing your dreams of buying a business, or three, or ten.
Here’s an interesting fact about buying businesses. In many ways, you’re better off being a marketer than a financier because good marketing (and sales skills) enable you to survive most post-acquisition problems such as a potential dip in revenues resulting from some customers switching to other sellers.