Acquiring a Small Business

A post from rayfinkle on the forum Corner of Berkshire and Fairfax that is always worth revisiting:

I’ve done this from a few different angles:
-Professionally: bought out small $5-50M revenue businesses without audits
-Personally: Spent several months shopping for smaller ($100-500k owners fcf) businesses

My learnings are:
1) You can buy businesses cheap: 2-5x owners cash
2) You can get unreal leverage (6-12 month payback on owners cash), with personal guarantees (be careful, this steals sleep)
3) Determining owners’ FCF is hairy. I’ve literally spent a month of 7 day weeks, 10 hour days digging through bank statements and credit card statements, talking to finance partners & equipment appraisers to nail down my 90% confidence FCF figure. It’s possible, but doing the work is IMPERATIVE. Even so, cut 30% from your best work and exercise some good professional skepticism with respect to seller representations
4) There is real opportunity to buy stable businesses cheap, but you’ll need to put 6-12 months into learning every little detail. It’s not easy and on day zero everyone knows more than you.
5) Although many small businesses are under-managed, don’t underestimate the power of momentum (in other words, sellers have done things for a reason. It could be laziness, but often it’s a real hairball problem
6) Don’t fire people day 0. I’ve seen this go sideways. Aim first then shoot.
7) Access to capital / banking relationships is a competitive advantage. Knowing how to manage a capital structure is not a common skill.