Today, I’m going to explain to you how to turn $100,000 into $50,000,000 through business acquisitions.
It involves my normal buy then build approach, but it’s a bit more than that.
This approach is a more advanced method rooted in capital allocation and deal-making, involving multiple acquisitions. As you’ll see, by rolling up multiple businesses into a single entity, you can dramatically increase their collective value and sell the combined operation for a significantly higher multiple.
Although this is a proven wealth-generating strategy, I’ll admit that I’ve hesitated to share it because it’s not for everyone.
Successfully executing it requires the right background, experience, and a specific skill set. But for those ready to pursue it, this path may be entirely new territory – and for those not quite there yet, it’s important to see what’s possible.
Whether you’re building from scratch or looking to scale through M&A, this approach could help you grow toward that $50,000,000 valuation. Let’s dive in and explore how acquisition entrepreneurship can unlock this kind of exponential success.
How Does the Capital Stack Work?
First, let’s start with the basics by understanding the capital stack, a fundamental concept in business acquisitions. Capital stack refers to the layered structure of different funding sources used to finance a project, commonly in real estate in acquisitions.
Buying a business is similar to buying real estate. You would most likely use a combination of equity (cash or raised funds) and debt (loan) to structure the purchase. More likely than not, you wouldn’t pay the full price upfront.
Now, there’s a significant difference between real estate and business buying that give acquisitions a clear advantage: when you purchase a business, the business’s cash flow covers the loan payments. This is not generally the case with real estate.
Done right, the business generates enough money to pay off the loan, pay you a salary, and provide capital to reinvest in growth. This is the essence of the capital stack – equity and senior secured debt work together to create wealth.
For example, when buying a $1 million business with an SBA loan, you might only need to invest 10–20% in equity – $100,000 to $200,000 – while the loan covers the rest. For a $4.5 million business, you’d need about $450,000 as a down payment, with the balance financed through the loan. Additionally, in some cases, you can negotiate with the seller to take a portion of the payment as a seller’s note, which the bank may count as equity.
This structure allows you to leverage a relatively small amount of cash to acquire cash-flowing assets, making it far more powerful than simply relying on your personal income to cover debt.
Overview of Advanced Acquisition Strategy
Now, for this acquisition strategy, we’re going to focus on targeting companies with earnings in the range of $1–3 million. For a business generating $1 million in earnings, with a hypothetical multiple of 4.5 (factoring in things like working capital or inventory adjustments), this translates to a purchase price of $4.5 million.
To normally fund this acquisition, you’d likely put down 10% as equity – around $450,000 in this case – and finance the remaining $4.05 million with an SBA loan, which is common and accessible for small business acquisitions.
However, here’s where it gets interesting: while you can use your own funds for the 10% equity portion, you can also raise that 10% through investors or creative deal structures.
The best way to fund the equity portion of a deal – especially if you’re doing just one acquisition – is to bring in investors. However, another effective method is leveraging a seller note, which can sometimes make up a portion of the equity required by the lender. Recently, even the SBA has shown support for this approach.
Keep reading for the step-by-step guide on how to execute this deal.
Steps to Executing Advanced Acquisition Strategy
How do you make this work? Here are the three steps:
Step 1: Target Off-Market Sellers
To start, focus on off-market sellers – business owners who aren’t actively listing their businesses for sale.
While working with brokers has its advantages, as their sellers are usually ready to transact, going directly to off-market sellers opens the door to more flexible deal structures. Yes, this approach can be time-intensive, but it gives you greater opportunities to negotiate favorable terms.
For target size, search for businesses generating $1–3 million in annual earnings, starting closer to the $1 million mark. These businesses typically sell for a multiple of their cash flow – often in the range of 4–5 times earnings.
Step 2: Structure the Deal with Equity, Cash, and Seller Notes
Then, once you’ve found a business owner who is willing to sell, structure the creative deal like so:
Offer 20% Equity in a New Entity (NewCo)
Propose creating a new company, NewCo, which will take over the acquired company, where the seller retains a 20% ownership stake. Their current business assets are transferred into NewCo, making them a minority owner in the new structure. This provides the seller with ongoing equity in the business’s future growth.
Pay 60% of the Enterprise Value in Cash
For a business that costs $4.5 million, you’d pay approximately $2.7 million in cash to the seller at closing. This payment is financed through a bank loan, such as an SBA loan or another senior lender. The seller gets significant liquidity upfront, offering them immediate value.
Defer 20% Through a Seller Note
The remaining 20% of the purchase price is deferred and paid over time, structured as follows:
- 10% Seller Note: A straightforward loan with a 10-year amortization, a 5-year balloon payment, and ideally, interest-only payments in the first year or two.
- 10% Earnout: A contingent payment based on the business maintaining performance over the next couple of years. This protects you from downside risk while rewarding the seller for stability.
With this being said, while seller notes can be a great tool to reduce your cash outlay, relying solely on this strategy can present challenges. Sellers, particularly for high-demand businesses, prefer cash at closing, so you’ll want to consider other means to raise the 10% equity if the seller doesn’t agree to the note.
Overall, this financing structure allows you to minimize your out-of-pocket costs while creating a win-win scenario for you and the seller. The seller stays involved, transitioning out gradually, and shares in the future upside of the business while you gain control and the ability to scale.
Step 3: Create Perceived Equity for the Bank
From the bank’s perspective, this structure creates 40% equity in the deal (20% from the seller’s retained stake and 20% from the seller note and earnout), even though the reality is that only 20% of the equity is actual ownership by the seller, while the rest is deferred payment.
From the bank’s perspective, the seller note is considered equity because the seller’s repayment is subordinated to the primary loan – similar to a second mortgage. In other words, the seller gets paid only after the senior secured loan is repaid in full.
For instance, if you purchase a business for $4.5 million and, unfortunately, have to sell it for $2 million, the $2 million goes entirely to the senior lender. The seller and other subordinated parties would receive nothing, which is why sellers take on significant risk with this type of structure.
Because of the perceived equity, the bank will be more willing to finance the remaining 60% because the deal appears highly leveraged on equity. Your cash investment approaches zero, yet you retain 80% ownership of the new company.
Is There Enough Skin in the Game?
One question often comes up: “How can you do this with so little of your own money?”
While this strategy minimizes your out-of-pocket investment, you will be expected to have some skin in the game, as banks and sellers want to see you contribute funds. This may be for due diligence fees, lunches with sellers, or initial equity in the first deal.
This is where your first acquisition helps to set the stage. Once you establish credibility and secure the first business, you can roll the strategy forward. Each subsequent acquisition strengthens NewCo, adding more earnings and increasing enterprise value.
How to Pitch This Deal to a Seller
You might wonder: Why would a seller agree to this deal, especially if they aren’t actively looking to sell? It ultimately comes down to how you pitch the deal, but once you do, the benefits to the seller are clear.
To get sellers on board with this strategy, here’s the pitch:
“Your 20% Stake Will Grow”
By retaining 20% equity in NewCo, the seller participates in the future growth of a $20 million earnings powerhouse. This equity could become more valuable than the entire sale price of their individual business.
“We’re Doubling Value Together”
Point out that their business on its own might never scale beyond its current size. With this roll-up strategy, you’re engineering a business worth significantly more than the sum of its parts.
“You Stay Involved at Fair Compensation”
Offer the seller a fair salary to continue running operations during the transition, ensuring continuity while they prepare for eventual retirement.
To recap, the benefits for the seller include: 60% of the enterprise value upfront, giving them immediate liquidity; future upside from the 20% equity stake; and a sustained role and compensation.
This strategy aligns the seller’s interests with yours, ensuring they stay invested in the company’s success while reducing your upfront cash burden.
This strategy requires careful negotiation and trust-building, but when executed correctly, it’s a powerful way to acquire a business while preserving your own capital.
The Power of Stacking Earnings and Multiple Expansion
If this already sounds like a powerful deal structure, just wait. I haven’t even gotten to the good part.
To turn this into something really transformative, this is how you scale the strategy even further:
Imagine starting with your first acquisition and forming a new entity – let’s call it NewCo. Targeting business with earnings in the $1-3 million range, let’s assume an average of $2 million in earnings per business. Using the same creative financing structure, you acquire ten businesses, each generating $2 million annually.
By consolidating these businesses under NewCo, you create a company with $20 million in EBITDA. This aggregation unlocks a powerful concept called multiple expansion. Smaller businesses typically sell for four to five times their earnings. However, larger companies – those with $20 million or more in EBITDA – can command significantly higher multiples, often in the range of seven to 7.5 times earnings or more.
The impact of this strategy is substantial.
By combining these businesses into a single entity, you significantly increase their collective value. For example, by acquiring ten businesses at a 4.5 multiple and selling the consolidated NewCo at a 7.5 multiple, you effectively double the enterprise value.
In comparison, if you sold each business individually at a 4.5 multiple, the total value would only be $90 million. By consolidating and scaling, you add $60 million in additional value simply by unlocking a higher valuation multiple.
So how do you make this work? Follow this structure for each acquisition:
- The seller retains 20% equity in each NewCo, while you consolidate all the businesses into a single entity under your control. Each business contributes a modest management fee to cover NewCo’s overhead costs.
- Centralize key functions like marketing, accounting, and HR in order to streamline operations, reduce inefficiencies, and improve profitability. This integration not only makes the business easier to manage but also significantly enhances its value to potential buyers.
By the way, if a seller wants to step away entirely, you can structure a buyout of their remaining equity or bring in the management team as minority stakeholders by having them purchase equity at a discount – or full enterprise value, depending on your approach.
Remember, larger businesses are more attractive to buyers because they offer stability, operational efficiency, and market presence. By presenting a unified and streamlined entity, NewCo becomes far more valuable than the sum of its parts.
This Strategy is Simple, But It’s Not Easy
“Oh okay, Walker, I’ll just go ahead and make that happen.”
No, I get it. I’m making this strategy seem a lot easier than it is, but there’s a lot at play you need to be aware of to pull this off successfully. Executing on this strategy requires:
Capital Access: While you minimize your own investment, you still need funds for due diligence, legal fees, and deal sourcing.
Negotiation Skills: Convincing sellers to agree to this structure requires finesse and credibility.
Leadership & Operational Expertise: Simply owning ten separate businesses won’t maximize value. You must integrate the businesses effectively, aligning cultures, systems, and processes.
To do this, you need to:
- Centralize Key Functions: Combine marketing, accounting, HR, and administrative tasks at NewCo’s headquarters. While local operations might remain decentralized, governance and support functions should be unified to improve efficiency.
- Create a Unified Culture: Align values, systems, and processes across all businesses to make the whole greater than the sum of its parts.
- Formalize Leadership and Oversight: Establish a professional board to guide strategy and ensure smooth operations across all entities.
The Exit: Selling to Private Equity
Once you’ve scaled and integrated the businesses under NewCo, you position it as an attractive target for private equity or another buyer seeking a high-performing, scalable operation.
With $20 million in EBITDA, NewCo could command a multiple of 7, 8, or even 9 times earnings, resulting in a valuation north of $150 million. After settling debts and seller notes, the remaining equity represents a substantial windfall – a massive return on your initial investment and a testament to the power of strategic acquisitions and consolidation.
Unlike taking the buy-then-build approach and applying it to a single acquisition, this strategy combines creative financing, capital allocation, operational integration, and deal-making to transform $100K into a life-changing exit. It’s not just about buying businesses – it’s about building something exponentially more valuable through strategic acquisition and integration.
While not for the faint of heart, this is a proven path that can help you multiply value in a relatively short period of time and generate significant wealth.
If you’re ready to acquire a business in the next 12 months, the Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.
