Want to add a new service to your shop? Sick of losing customers to the competition down the block? A business acquisition might not be as big of a stretch as you think.
I want to use this article to cover the math you’ll need to do to figure out if acquiring your competition is the right move. Here is the information you’ll need:
1. Your monthly cash flow
2. Your competition’s monthly cash flow
3. Your bank’s offer for interest rates and loan term
4. Your competition’s selling price
You don’t need six-figures in savings to buy your competition. Here’s the math to prove it.
First, make sure you have a good enough financial situation to obtain an SBA 7a loan. These loans are easier to get from banks because they are guaranteed by the federal government. Work with the SBA or your current bank to find an SBA preferred lender who can help you figure out the requirements. You’ll typically need good business credit, three years of income statements, and a current balance sheet.
From this, you’ll be able to get preliminary terms of an offer from your bank for a loan term (how many years until you pay it off) and interest rate. You can use these numbers, plus the selling price of the business you want to buy, to calculate whether or not it makes sense to pull the trigger and buy the business.
Start negotiations with your seller. If they are open to selling, they will have to share financial information with you. You can use this to come up with a number for your acquisition offer. Figure out how much the owner takes home every year. Your offer can be based on “seller’s discretionary earnings” or SDE, which is basically how much money the owners make off the business annually. Per BizBuySell, in 2020, auto shops typically sold for between 2.5 and 3.5 times SDE.
Next, figure out if you can afford the acquisition. Here is the math to make that decision:
1. Take your highest offer price and plug it into a loan calculator, along with the loan terms from your bank.
2. Compare the monthly payment to the sum of your shop’s cash flow and the competition’s cash flow.
3. If the sum of cash flows is at least 3x the monthly loan payment, you will likely be approved for the loan and can afford the purchase. If you can’t pass this check, the acquisition isn’t worth it. Walk away!
If you’ve passed the financial test to see if buying your competition is feasible, you can begin looking at strategy. You may have to convince the seller that your plans for their business are reasonable. You’ll have to adapt your team, your time, and your finances to the new size and structure of your shop. You’ll have to integrate locations and systems. But in the long run, smart acquisitions will help your shop grow exponentially faster than if you stick to organic growth.
Buying your competition could be worth it. Start by doing the math and follow the above formula to make sure.
Let me know how it goes – email me at firstname.lastname@example.org.
Driven Performance Advisors
Driven Performance Advisors creates profitable, efficient, and stress-free $5M automotive aftermarket shops. Schedule a consultation at drivenperformanceadvisors.com. Subscribe to DPA Weekly at drivenperformanceadvisors.com/dpaweekly.