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Take Five #133: LOI structures using LLCs as the buyer entity can trigger some dire consequences, and more
1. “Real-Life Roll-Up Case Study”
As Rafi put it, “Sometimes you have to find a business to get a seat at the table, and then enhance it.”
After the initial acquisition, the first couple add-on targets require outreach and hustle — nothing crazy. The pool industry operates with a lot of subcontractors, so he put the word out to their best subs — if they have other pool contractors they work for, let them know that Rafi is open to buying them.
Once he got a couple add-ons under his belt, he found that people started to reach out to him. He started to build a reputation.
He put the message out to his distributors (chemicals, parts, etc.), letting them know to find him sellers as well — it’s a win-win in that scenario, as the distributors know that Rafi is growing, so they want their slower-growth clients to sell to Rafi, rather than retire or sell to another slower-growth company. The distributor gets to retain the client’s business, the seller finds a great buyer, and Rafi finds another add-on.
2. LOI structures using LLCs as the buyer entity can trigger some dire consequences
3. SBA lender data and findings from the FDIC 2024 Small Business Lending Survey
Among the largest banks the practice of decision makers meeting with applicants is fairly rare — less than 25% of the time.
However, 95% of banks with less than $500 million in assets meet with applicants, compared to only 65% of banks with $3 billion to $10 billion in assets.
Small banks have a flatter organizational structure than large banks, particularly in how they gather information. Small banks are much more likely than large banks to have meetings directly between small business loan applicants and decision-makers.
Nearly 90% of small banks meet with applicants, compared to less than 40% of large banks.
These meetings allow small banks to lend more flexibly, especially to start-up businesses, as they may yield valuable soft information that can compensate for a lack of hard information. In-person meetings, as opposed to virtual meetings or teleconferences, further emphasize the importance of banks’ proximity to small business borrowers.
4. Great deals don’t usually fall from the sky, so who’s already passed on it, and more importantly, why?
5. Business Valuation 101 (including acronym definitions)
If you’ve ever wondered what the hell EBITDA, SDE, FCF, UFCF, LFCF, DFCF or any of those weird finance acronyms mean, I’m going to simplify it for you.
When a business goes up for sale via a broker, the usually package the details in a CIM (Confidential Info Memorandum).
Don’t fret because it sounds fancier and more complicated than it is.
This CIM should answer some basic information for you, such as:
-What does this business do? -Where is the business located? -Is the business growing? -And most importantly, How much does the business make?
But no matter what a business makes in the CIM, that is not how much the business will make for you. Do not rely on your broker, lawyer, banker, etc to tell you how to determine that number.
I will walk you through a simple guide to determine how to properly value a business.
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