How to Buy a $5 Million Flooring Business for $155k Upfront

0:00 hey there I found this commercial flooring business in Dallas Texas it does close to 5 million of Revenue 1.25 million of cash flow and the owner is asking for 3.3 million I want to talk you through the step-by-step process to buy this business for only $155,000 of cash out of pocket that's right you can buy this $ 1.25 million cash flow business for just $155,000 now before I get started I want to make it very clear I did not

0:28 underwrite this business so I'm not suggesting that you buy this specific company I'm just going to use it as an example here to show you how you can buy a potentially great company for relatively not a lot of money out of pocket on this listing the owner is asking for $3.3 million for the purpose of this exercise we're going to say our offer is 3.1 million that's going to include both the business and any closing and legal costs here's going to

0:53 be the structure that we're going to offer to the seller and where the money is going to come from we're going to use an SBA 7A loan to buy this business the SBA program is a very important Loan program from the US government designed to help people like you buy businesses just like this for not a lot of money out of pocket they're going to help you get a relatively large loan for the size of this business in this situation we're

1:16 assuming that you're able to get 2.48 million from the SBA that's 80% of the purchase price which we said it was going to be 3.1 million we're going to ask for $465,000 seller notes with 5% interest which will sit full standby behind the SBA debt and there will be no payments for 24 months that means after 24 months you're going to start making payments on the seller not we're also going to offer a $200,000 earnout bonus if the business

1:44 exceeds 1.5 million of cash flow in the first two years finally we're going to put down 5% of the purchase price as Equity that means cash out of pocket or cash from your investors 5% is $155,000 that is the 5% absolute minimum that is allowed by the SBA meaning you must put up 5% of the purchase price or more as Equity most banks are going to prefer 10% or 15% but if you look for the right Bank you're going to be able

2:12 to put down just 5% of the purchase price I ran the calculation for how much you're going to be paying in SBA loan payments as well as the seller note payments remember the seller note payments happen only after 24 months so your SBA loan payments are going to be 421,000 $18 per year and those are going to span your SBA payments are paid over 10 years every single month that's the standard structure of the SBA 7A requirements

2:40 your seller note is only going to kick in after 24 months and you're going to be paying $124,000 per year to the seller for the duration of those 10 years so your total debt payments after two years every year are going to be $45,100 I'm also going to assume that you're going to need to hire an executive like a c CEO here this person is going to get paid $250,000 Allin given the cost of the debt payments assuming we're also paying

3:07 the seller note and the salary of the CEO your cash flow after debt payments is going to be $480,000 per year remember you put in $155,000 here so receiving $480,000 is a cash onh return of 9% that's very very high if you compare that to the S&P 500 the index it is historically returned between 8 to 10% per year and in this situation you're getting 39% per year needless to say this can be a very good investment I

3:39 want to call out a few important notes first off to get an SBA loan they're going to require a personal guarantee that means that if you're not able to service the debt payments or something happens to the business the bank can and will likely come after you and your personal assets so make sure you proceed with caution this is a huge huge risk I looked up the default rate of personal guarantees and they're relatively low but that doesn't mean that they don't

4:03 happen so you have to be very careful right hiring a good general manager for your business is very difficult the best private Equity firms in the world only hire successfully at about 30% that means one in three of those general managers is going to be very successful so you should plan on being very Hands-On with your general manager and the rest of the management team after you buy the business ideally if it's a local business you live nearby so you

4:27 can actually come to the office and check on how things are going and support the operation again you need to do your own homework here I haven't done my homework in order to figure out whether this is a great business to buy or not but I think it's of a good size and it could be interesting enough for somebody to dig in here thank you for listening I hope you learned something important today as always nothing here

4:46 should be considered investment advice so please please please do your own research before taking any action and if you like this video make sure you subscribe to the channel for more content just like this have a great day