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How to Leverage Other Peoples' Money to Buy a Business

by Tyler Tysdal
March 11th 2021

Robert Hirsch from Freedom Factory talks about a question that they get asked quite often, which is, how do I pay for a business? Now after doing this almost exclusively for 20 years, all you do is... More

Yeah, yeah. Hey everybody robert Hirsch from Freedom Factory here And I want to answer a question that we get a lot, which is how do I pay for a business now after doing this almost exclusively for 20 years. all you do is see these deals go through and what looks normal to me is really different to a lot of my fellow entrepreneurs. And so I was with a group of entrepreneurs speaking to him last night and what they told me, they said robert, I don't have two million sitting around to buy a business. You know, maybe a private equity guys or venture capital guys are more successful entrepreneurs, but that's not me. And I thought about it and I gave a little bit of a chuckle and I realized that they're probably not the only entrepreneurs that think this. And so I wanted to talk about different ways to pay for a business. So there's a couple of ones that are pretty interesting. You can do it either through equity or through debt, right? So let's start with equity. So equity, you know, you can put together and invest around to acquire a company, you can secure it by the business. For me, I do better with just a few investors, not a lot of little ones, you know, the friends and family and that could be nice for For smaller things, but for me, I like one or two sophisticated investors if I'm going to raise an equity round, but the reality is I think for most businesses this size, I like debt for 90% of applications and we can talk about what the difference looks like in a little bit but so there are different types of debt.

My favorite kind of debt when I'm buying a business is seller financing. So if the seller is selling a great business and you've probably seen some videos of mind talking about the difference between you'd rather buy a great business at a good price and a good business at a great price. So if you're still in a great business and the seller is confident in their business, they'll be happy to take a note on it And you know sometimes as little as 10 or 20% when you're trying to bridge the gap. You know sometimes this as much as 90%, I've seen 90% seller carry just secured by the business and if you're not successful the business goes right back to them and they like their business so they're happy to do that. You know there's also bankers but you know it's so funny the old axiom about bankers wanting to lend you money when you don't need it and don't lend you money when you need it. In my experience, that's been true if you've got a successful business, you know the lending money on it but they're going to want you to collateralize it with your other business in most circumstances. So bankers are there and if you've got a great banking relationship Maybe it works out well. But what I've seen work out the best is small business loans or S. B. A. loans, small business administration loans and you can do it is with as little as 10% down.

So if you're buying, let's say you're buying a business at three X. And it's two million, that means it throws 666,000 year in free cash flow. And if you can buy that for $200,000, I mean you look at stock valuations and things along those lines, but When you're buying a business at three action, you're putting 10% down As an entrepreneur. I can't think of a better deal than that S. B. A loans have their own restrictions, you have to put a personal guarantee on it. I think they cap it at $5 million dollars currently and we can talk you through all the complexities of of what that looks like. But S. B. A. Loans are great. And then you know, the big thing in terms of the plan that you put together is you know, talk about your stupid human trick or the one thing you do better than anybody else. I've talked about it many times in the past, I'm pretty good at sales and marketing. That's all I do. All I do is sell businesses. And if I if I look at a business that has a superior quality product, but a sales problem.

Well that's a great fit for me but I can fix it like that. And so or maybe you're a software engineer from MIT. And you you know, you can build great software programs and you've got this business is on fire. But you know, your software program is held together with duct tape and bubble gum. Well, you can come in and solve that problem right away. So when I buy a business, I try and be strategic about buying a business that fits my skill set. And remember when you're buying a business, you don't have to have $2 million dollars to write a big check. And sometimes ironically buying a business is cheaper than building it yourself. If you're buying 660, of free cash flow for 200,000 I would have a hard time building it for that. So I hope this stimulated your creativity. If you have any questions about that, why don't you give us a call it Freedom Factory or anything else? And we'll be happy to walk you through it. I'm robert Hirsch, thank you so much for watching, please like and subscribe. And we'll see you soon.

How to Leverage Other Peoples' Money to Buy a Business
How to Leverage Other Peoples' Money to Buy a Business
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