WEBVTT

1
00:00:00.000 --> 00:00:02.800
and he was like, that doesn't make sense. How could they offer you that much money?

2
00:00:02.800 --> 00:00:05.520
Like, they'd have to 5x it in order to make a return on that.

3
00:00:06.160 --> 00:00:08.400
Welcome to the game where we talk about how to get more customers,

4
00:00:08.400 --> 00:00:10.400
how to make more customers, how to keep them longer,

5
00:00:10.400 --> 00:00:12.880
and the many failures and lessons we have learned along the way.

6
00:00:12.880 --> 00:00:14.160
I hope you enjoy and subscribe.

7
00:00:14.800 --> 00:00:16.400
What's going on, Emotionation?

8
00:00:16.400 --> 00:00:19.760
I was having an interest conversation yesterday with a friend of mine,

9
00:00:20.480 --> 00:00:22.960
and I was telling him about how we got an offer on one of our companies

10
00:00:22.960 --> 00:00:24.240
for a very large sum of money.

11
00:00:24.240 --> 00:00:25.520
And he was like, that doesn't make sense.

12
00:00:25.520 --> 00:00:27.040
How could they offer you that much money?

13
00:00:27.120 --> 00:00:29.760
Like, they'd have to 5x it in order to make a return on that.

14
00:00:30.400 --> 00:00:32.400
And what it showed is that he didn't really understand capital markets.

15
00:00:32.400 --> 00:00:36.640
And so, as an aside, I think that one of the most important things that happens in the

16
00:00:36.640 --> 00:00:39.360
progression of entrepreneurs from zero to 1 million, 1 to 10 million,

17
00:00:39.360 --> 00:00:42.320
10 to 30 million, 30 to 50, 50 to 100,

18
00:00:43.120 --> 00:00:46.400
is that you relinquish control and you gain new decision-making,

19
00:00:46.400 --> 00:00:48.320
new frameworks to think with, right?

20
00:00:48.320 --> 00:00:50.640
And so for us, if you don't know who I am, my name's Oxymozzi,

21
00:00:50.640 --> 00:00:53.680
I'm an acquisition.com where portfolio companies do about $85 million a year.

22
00:00:53.680 --> 00:00:55.360
And the reason I make this channel is because a lot of people are broke,

23
00:00:55.360 --> 00:00:58.400
and I do not want you, most of the nation to be one of them, all right?

24
00:00:58.400 --> 00:01:01.440
And so, there are four ways that you can exit a company, all right?

25
00:01:01.440 --> 00:01:02.720
And I'm not going to get dive into those.

26
00:01:02.720 --> 00:01:05.760
I'll make the other three, a subject for another video,

27
00:01:05.760 --> 00:01:08.560
but you can sell it, you can close it, you can give it away,

28
00:01:08.560 --> 00:01:11.840
or you can take out debt, all right, which basically is a liquidity event

29
00:01:11.840 --> 00:01:14.400
that you take against the asset that you have, which is the business, all right?

30
00:01:14.400 --> 00:01:20.400
So, there's the four ways that you can kind of have a shift of risk away from you, okay?

31
00:01:20.480 --> 00:01:26.080
So, I'm going to just talk today about how buying businesses works in the more formal sense, all right?

32
00:01:26.080 --> 00:01:30.400
I'll do another video on the actual sales process of having institutional investors.

33
00:01:30.400 --> 00:01:33.280
So, you know, if you're trying to sell a small business, you know,

34
00:01:33.280 --> 00:01:35.840
that's doing less than a million dollars a year in profit,

35
00:01:36.400 --> 00:01:38.480
you're not really going to get, it's going to be very difficult to sell that,

36
00:01:38.480 --> 00:01:42.960
because it's too risky, and you're going to be dealing with mom and pops,

37
00:01:42.960 --> 00:01:46.320
and unsophisticated investors, and you're an unsophisticated seller.

38
00:01:46.320 --> 00:01:47.680
So, it's just kind of the blind leading the blind.

39
00:01:48.320 --> 00:01:51.680
If you get over a million dollars, you have the potential,

40
00:01:51.680 --> 00:01:56.640
if you have over 10 million in sales per year, to have institutional investors.

41
00:01:56.640 --> 00:02:02.400
Now, interestingly enough, the kind of the magic number for kind of big money deals is $5 million,

42
00:02:02.400 --> 00:02:04.880
and I'm going to use that as a rough, rough thing here, all right?

43
00:02:04.880 --> 00:02:10.880
If you're less than $5 million, the average trading price for those types of businesses is $3.75,

44
00:02:10.880 --> 00:02:14.000
all right? That's the multiple that you get on the earnings that you have in that company.

45
00:02:14.080 --> 00:02:18.560
If you're over $5 million, the average is $6.75, all right, so it's higher.

46
00:02:19.680 --> 00:02:22.800
Now, here's the important point. There's a million factors, okay?

47
00:02:22.800 --> 00:02:29.840
So, there's obviously 50% that are below this number, and 50% that are above this number,

48
00:02:29.840 --> 00:02:35.040
and that's on both sides, right? And obviously, this one is impacted by the fact that there's

49
00:02:35.040 --> 00:02:39.040
so many businesses that don't even get reported that could shift it, or just close down, etc.

50
00:02:39.040 --> 00:02:41.600
All right, but if you sell, and by the way, if you're curious about this,

51
00:02:42.320 --> 00:02:46.000
only 20% of companies that want to get purchased actually get purchased,

52
00:02:48.480 --> 00:02:53.760
and I think it's 30% of companies ever even enter that process, so it's a very small

53
00:02:53.760 --> 00:02:57.840
percent of percent that actually end up selling. But I think understanding this process will also

54
00:02:57.840 --> 00:03:01.840
help you understand where value is derived in the capital markets, which is like I said earlier,

55
00:03:01.840 --> 00:03:06.560
where I think the transition is for entrepreneurs in terms of leveling up your skill set.

56
00:03:06.560 --> 00:03:09.600
So, this may be a little bit over the head for the stroller entrepreneur,

57
00:03:10.240 --> 00:03:15.040
but for the guys who are subfigures, they figures, hope to be nine figures, etc. Then this will

58
00:03:15.040 --> 00:03:20.560
be made for you, okay? So, let's dive in. So, let's say that we have a sample business here that's

59
00:03:20.560 --> 00:03:28.480
doing, let's say, shoot, let's say 20 million top line, and they're doing 5 million bottom line.

60
00:03:28.480 --> 00:03:32.880
All right, now this is going to be EBITDA, which is the fancy accounting term, which is earning

61
00:03:32.880 --> 00:03:39.040
before interest tax depreciation and mortization. But it's just for, I'm not even going to get into

62
00:03:39.040 --> 00:03:43.920
that, but for lack of literature, it's just rough-handed profit with addbacks and stuff, okay? So,

63
00:03:43.920 --> 00:03:51.680
let's say that this company gets an offer for 5x, okay? So, that would be a 25 million dollar

64
00:03:52.480 --> 00:03:58.640
enterprise value, okay? That's the, this is the multiple, and this is the new enterprise value.

65
00:03:58.640 --> 00:04:04.720
Now, when you hear someone say, hey, I sell my company for x, it's easy for someone to flex

66
00:04:04.720 --> 00:04:08.480
like that, right? And most of the time, people don't want to share their numbers because,

67
00:04:09.680 --> 00:04:15.040
most times, it's because they're not good. And I want to kind of demystify this process for you,

68
00:04:15.040 --> 00:04:20.880
all right? Or they're under some sort of NDA, because they think that for them, a founder

69
00:04:20.880 --> 00:04:24.480
announcing a sale would materially affect the business, which sometimes can happen, all right?

70
00:04:24.560 --> 00:04:30.240
But let's get to it. So, 25 million dollar enterprise value. How does that actually break down?

71
00:04:30.240 --> 00:04:35.680
So, there are, there are four things that someone can do in breaking down this, this number.

72
00:04:35.680 --> 00:04:39.120
All right, the first is you're going to have a component of cash, which is what everyone wants to

73
00:04:39.120 --> 00:04:43.040
talk about, right? Cash is king. How much they're actually going to pay. The next is going to be

74
00:04:43.040 --> 00:04:48.160
what percentage is going to be seller financed, which means that you, right? Basically, you get a

75
00:04:48.160 --> 00:04:52.320
debt note on the business rights of your debt note that it owes you something, right? And the new

76
00:04:52.320 --> 00:04:56.960
owner owes you something off of the cash flow from the business, all right? The next is going to be

77
00:04:57.840 --> 00:05:05.360
earn out, which is you get kind of like bonuses or so to speak from the performance of the

78
00:05:05.360 --> 00:05:09.120
business in the future. This is, and I'll get to the importance of each of these in a moment.

79
00:05:09.840 --> 00:05:17.760
And the final one is roll over equity, okay? And that means that the percentage of the business

80
00:05:17.760 --> 00:05:22.880
that you're going to choose to roll over into, you know, keeping so that they make sure that it's

81
00:05:22.880 --> 00:05:26.160
a good transition and that you're vested in not just taking the business and taking the cash and

82
00:05:26.160 --> 00:05:32.240
walking, which is fairly common, all right? And so, let me give you an example of an offer that I

83
00:05:32.240 --> 00:05:37.200
had on one of the businesses that we own. We decided not to really pursue the offer, but this

84
00:05:37.200 --> 00:05:41.120
was an offer that we had on one of our, one of our business entities. So, this was the actual

85
00:05:41.120 --> 00:05:50.160
offer as it broke down, okay? It was a $17 million cash offer with $3 million in seller financing.

86
00:05:51.760 --> 00:05:56.160
I think there, which is if you're breaking down the percentages here, there was a $5 million

87
00:05:56.160 --> 00:06:01.840
earn out. And I think in the talks, they said, you know, it actually, we can put that over here,

88
00:06:01.840 --> 00:06:05.920
and we won't, you don't have to sell our financing, all right? So, this was, this was an offer

89
00:06:06.880 --> 00:06:12.320
that we were given on the business, or one of our businesses, okay? So, all of a sudden,

90
00:06:12.320 --> 00:06:16.400
you're like, huh, that's interesting. Now, I'll give you a different one that we got on the same

91
00:06:16.400 --> 00:06:20.720
business. And if you're like, how do you, how do you start getting people making offers? It's like,

92
00:06:20.720 --> 00:06:26.320
well, people will approach you for businesses of a certain size and it might be a category fit

93
00:06:26.320 --> 00:06:31.440
for them because you got to remember that these, you know, financial institutions want to

94
00:06:32.400 --> 00:06:35.440
place money, they get paid to place money, they get paid to make deals. And so, they actively

95
00:06:35.440 --> 00:06:39.360
reach out just like an app on method, you're a customer that's a product, and they want to buy it,

96
00:06:39.360 --> 00:06:42.320
right? And that's kind of the idea. So, there was a different offer in the same company that

97
00:06:42.320 --> 00:06:48.640
would, was from a few months prior, that was a $20 million enterprise value. And it was structured

98
00:06:48.640 --> 00:06:56.000
like this, they wanted to give $13 million in cash. And then they wanted to, I don't think there was

99
00:06:56.000 --> 00:07:01.600
any, any seller financing. So, seller financing, I'll just put F here so you know what that is.

100
00:07:02.400 --> 00:07:10.320
There was a, and then there was no earn out, but there was a massive 35% chunk of rollover equity.

101
00:07:14.240 --> 00:07:18.720
Most of the nation real quick, if you are a business owner that has a big old business and wants

102
00:07:18.720 --> 00:07:24.160
to get to a much bigger business, going to $50 million plus we would love to talk to you. And if

103
00:07:24.400 --> 00:07:27.680
you like that, and would like to hear more about it, go to acquisition.com and you can plan

104
00:07:27.680 --> 00:07:31.680
anywhere on the page and talk to one of our team and see if we can help you get there.

105
00:07:35.360 --> 00:07:40.960
Now, the reason this is important is that it's worth understanding. Now, if you have something

106
00:07:40.960 --> 00:07:45.440
like this, right, and we're looking at a deal, there's obviously pros and cons to use

107
00:07:45.440 --> 00:07:49.680
with these things. The more you rollover, if you feel very confident about the future of your

108
00:07:49.680 --> 00:07:54.960
company, then you would want to potentially roll more, if that also assumes that you are confident

109
00:07:54.960 --> 00:07:58.080
in the person who's buying it, that they can perform the way that you would be performing, right?

110
00:07:58.880 --> 00:08:03.520
And so, in some transactions, it's more of a de-risking, in other transactions, it's more of an exit.

111
00:08:03.520 --> 00:08:07.840
And what's also important to note is that for these rollover equities or earn out pieces,

112
00:08:07.840 --> 00:08:13.840
these ones right here, it's, what do I have to do? Do I have...

113
00:08:14.000 --> 00:08:21.200
So, for example, if someone says, hey, I want to buy this, but you have to retain all the things

114
00:08:21.200 --> 00:08:24.560
that you're doing right now, then it's like, well, that's not nearly as interesting as someone is saying,

115
00:08:25.680 --> 00:08:28.880
you don't have to do anything you walk away tomorrow. There's usually some sort of transition

116
00:08:28.880 --> 00:08:35.040
period during this period of time. Now, let's go to this example here for 25 million. This is not

117
00:08:35.040 --> 00:08:40.720
the company that I was talking about, but just for illustration's sake, okay? How can they make a

118
00:08:40.720 --> 00:08:44.320
return on this, right? So, because you see here, they're making five million dollars a year,

119
00:08:44.320 --> 00:08:48.240
how can they make a really good return on this kind of money, all right? So, let's draw it out.

120
00:08:49.840 --> 00:08:55.120
If they were to put... Let's use this first example because it's a little cleaner, all right?

121
00:08:55.120 --> 00:09:01.040
So, let's say they have $17 million in cash that they have to put up, right? Now, note it, note that

122
00:09:01.040 --> 00:09:05.200
this rollover equity, they don't have to pay anything for, and this earn out, they don't have to

123
00:09:05.200 --> 00:09:08.320
pay anything for either, and the seller financing, there's no money that's coming out. So,

124
00:09:08.320 --> 00:09:12.880
really, the only thing they have to procure is the $17 million cash, right? Now, let's say that

125
00:09:12.880 --> 00:09:17.920
they get debt for two-thirds debt, right? So, that means that they're going to get $11 million of debt,

126
00:09:19.200 --> 00:09:23.040
which means they're going to take a loan, right? And then they're going to put roughly, you know,

127
00:09:23.040 --> 00:09:29.520
$6 million in cash, right? Actual cash. Now, you're going to get all of this, right, together,

128
00:09:29.520 --> 00:09:36.160
but they're going to get this much as debt from someone else, right? Right? Okay. And so,

129
00:09:36.160 --> 00:09:44.400
what happens now is let's imagine the company goes from $5 million to $5.5 to $6, let's say we do

130
00:09:44.400 --> 00:09:48.960
$7, and then, you know, $8, all right? So, let's just say that that's the growth of the company over,

131
00:09:48.960 --> 00:09:55.840
you know, year one, two, three, four, five. And typical private equity hold periods or five periods,

132
00:09:55.840 --> 00:09:59.840
five to seven, because it depends on how long it takes them to transaction, et cetera. But that's

133
00:09:59.840 --> 00:10:05.440
typically how a deal would be structured. Now, let's look at this now. So, they put $6 million

134
00:10:05.440 --> 00:10:11.120
into the deal, right? Do-do-do into the deal. Awesome. Now, from this period of time,

135
00:10:11.840 --> 00:10:16.720
all of this extra, extra money, if we'd add this together, let's see what this is. We've got 15,

136
00:10:17.840 --> 00:10:26.640
16, 17, 18, 18 plus, so it's 26. And then, well, shit, I should have just added this better. Hold on,

137
00:10:26.640 --> 00:10:30.640
people who are editing this. So, let's add this together. This is the amount of cash that they

138
00:10:30.640 --> 00:10:39.200
would be able to make. They would make 5, 10, 15, 20, 25, 25 million plus 3, 2, 1. So, 25, so 6,

139
00:10:39.760 --> 00:10:44.720
so 31 and a half million, okay? So, they're going to make 31 and a half million during this period

140
00:10:44.720 --> 00:10:51.520
of time, all right? But wait, there's more. Let's say that they were able to buy this company at a 5x

141
00:10:51.520 --> 00:10:55.280
multiple, and they're able to sell this company now to 7x multiple at the end here, because they

142
00:10:55.280 --> 00:10:59.120
work on the business structure. They decrease turn and improve the, you know, improve the margins,

143
00:10:59.120 --> 00:11:04.000
whatever it is, to make the business more soluble, okay? Now, what happens is that they've 31

144
00:11:04.000 --> 00:11:09.600
million that they've accrued, plus they get 7 times that, which is 56 million when they sell the

145
00:11:09.600 --> 00:11:15.600
business, right? So, if you add this plus this, and that would be maybe cash on the balance sheet,

146
00:11:15.600 --> 00:11:20.400
they would now have an 87 million dollar business. Crazy, right? Now, I know that sounds nuts,

147
00:11:20.400 --> 00:11:23.840
but usually they will keep the cash in the company, because they're going to usually use it to do more

148
00:11:23.840 --> 00:11:28.240
merchant acquisitions, or they'll keep it on the balance sheet, all right? And so, you have 87

149
00:11:28.240 --> 00:11:32.800
million dollars. Now, they bought this thing, right, for 25. That was the, that was the number that

150
00:11:32.800 --> 00:11:37.280
they had here, right? That was what they, what they claimed to have taped pay for it, right? But they

151
00:11:37.280 --> 00:11:41.440
really paid, because we now know, 17 million dollars for the business, right? Here's what's cool

152
00:11:41.440 --> 00:11:48.080
about this. Now, they actually only put 6 million dollars up for the business, and they turn that 6

153
00:11:48.080 --> 00:11:55.120
million into 87 million. Now, they have to pay back that loan, right? So, we got to subtract out

154
00:11:55.120 --> 00:11:59.840
that debt that they owe, right? Plus, whatever interest fees that they might have accrued on that. So,

155
00:11:59.840 --> 00:12:03.360
let's just say that's another, you know, 2 million bucks in interest. That would be really aggressive,

156
00:12:03.360 --> 00:12:10.320
but let's just say that that's what it was, right? And now, they're net, right? That they got on this

157
00:12:10.400 --> 00:12:20.960
was 70, 4 million dollars of profit. Now, we look at this 6, and now you realize that you just got

158
00:12:20.960 --> 00:12:30.400
like a 13x, you know, whatever it is, 13x return. Ish, 12.5. Pretty good deal, right? So, that is how

159
00:12:30.400 --> 00:12:34.640
the private equity world actually works. All right? And so, they didn't really do anything

160
00:12:34.640 --> 00:12:38.320
crazier. And what's going to happen next, right? You're like, well, how would somebody buy this for

161
00:12:38.320 --> 00:12:42.880
87 million? I'll show you. They're going to get it for, they're going to take it from 8, and let's

162
00:12:42.880 --> 00:12:47.680
say they get it to 12. And as companies grow in general, the multiples will improve, and they also

163
00:12:47.680 --> 00:12:52.800
do other things, et cetera. And they got this at a 7x, and they're going to try and sell it for a 10x,

164
00:12:52.800 --> 00:13:00.720
right? And during this period of time, let's say they go 9, 10, 11, 11.5, you know, as the, as the,

165
00:13:01.200 --> 00:13:07.600
oh, actually, I don't need to add that one. Let's say those are the yearly growth, you know,

166
00:13:07.600 --> 00:13:13.440
for this business. Okay? In terms of this, you know, again, you're one, two, three, four, five.

167
00:13:13.440 --> 00:13:18.240
All right. So, that's again, the same thing happens, yet again. And so, during this period,

168
00:13:18.240 --> 00:13:24.560
they got it for 74, right? Sorry, they got it for 87. And they're going to probably only have put

169
00:13:24.560 --> 00:13:29.680
in, let's say, $25 million into the deal, right? And they're going to sell it for, and they're

170
00:13:29.680 --> 00:13:39.040
going to have finance, whatever the rest of that is. That's $25, $62 million. So, $62 million in debt,

171
00:13:41.440 --> 00:13:45.920
which they're going to have $120 million. The amount of cash that's going to add up here is going

172
00:13:45.920 --> 00:13:52.000
to be $10. So, it's going to be $50 million in cash that they will have collected throughout the

173
00:13:52.000 --> 00:13:57.280
course of the business. So, and they now have $170 million dollar enterprise. They're going to

174
00:13:57.280 --> 00:14:02.240
subtract out this debt plus the debt service. So, let's just say that 62 plus, you know,

175
00:14:02.240 --> 00:14:07.360
6 million, whatever. So, that's 68 million is what we have to subtract out, right? And they're going

176
00:14:07.360 --> 00:14:13.600
to, in this instance, right? They're going to make whatever, a hundred, you know, roughly 102

177
00:14:13.600 --> 00:14:22.880
million dollars of profit. And that was off of their initial 25. And so, they forexed their money,

178
00:14:22.880 --> 00:14:27.200
right, in five years. That is how private equity is supposed to work. Now, obviously, they get

179
00:14:27.200 --> 00:14:33.200
higher returns because it costs them more in risk, more in resources. It's not, it's very active

180
00:14:33.200 --> 00:14:36.640
for them. It's not passive. And so, they're actively operating the business, and they'll usually

181
00:14:36.640 --> 00:14:41.600
buy businesses that they have expertise in, right? So, typically, you know, a private equity buyer

182
00:14:41.600 --> 00:14:46.800
would be someone who has a special, you know, some sort of specialty play. Many times, you know,

183
00:14:47.440 --> 00:14:52.640
there's three, there's two real types of buyers, I would say. You have, you have financial

184
00:14:52.640 --> 00:14:56.880
buyers, which are completely uninvolved. They want to get a good deal. And then you've got strategic

185
00:14:56.880 --> 00:15:03.120
buyers who are usually in the space. And we'll pay better multiples because they can immediately

186
00:15:03.120 --> 00:15:06.960
roll that company into their company and then increase their own valuation by disproportionate

187
00:15:06.960 --> 00:15:11.920
amount compared to what they bought for, right? And also, yield some synergistic returns from

188
00:15:11.920 --> 00:15:15.840
that company, maybe being added as a product line within their existing audience, etc, right?

189
00:15:15.920 --> 00:15:21.760
And so, I hope that this was not too jargony for everyone, but this is how the private equity

190
00:15:21.760 --> 00:15:25.120
will work. This is how you buy and sell businesses. This is how you get outsized returns.

191
00:15:25.920 --> 00:15:29.200
And this is the process. That's how it works. In a different video, I'll walk you through the

192
00:15:29.200 --> 00:15:33.520
actual sales process. Like I said, I've sold six companies. I've gone offers on a level a lot more.

193
00:15:34.480 --> 00:15:38.880
And so, I know the process pretty well. I've sold to mom and pops. I've sold to competitors. I've

194
00:15:38.880 --> 00:15:47.440
sold to strategic buyers. And I've sold to financial buyers. So, I've kind of gotten a whole

195
00:15:47.440 --> 00:15:51.680
universe of different looks and feels of deal structures. And this is one of them. And so,

196
00:15:51.680 --> 00:15:56.400
I actually think it's one of the key things to getting past 100 million is understanding M&A side.

197
00:15:56.400 --> 00:16:00.000
And so, I made this video because I love you all. And I don't want to be broke. And hopefully,

198
00:16:00.000 --> 00:16:06.160
this is not the kind of stuff that you are normal. Make money influencer, YouTuber, etc,

199
00:16:07.040 --> 00:16:11.680
is talking about. And so, anyways, I'm trying to get the stuff that I'm looking at right now.

200
00:16:11.680 --> 00:16:16.160
And I hope you guys enjoy it. Alright, I'll see you guys next time. Bye!