Why Me?

I hold both a Bachelor’s and a Master’s degree in engineering, along with practical experience in the construction field. Recently, I discovered a keen interest in acquisition entrepreneurship. This combination of expertise made me well-suited to scout for businesses to acquire.

That’s how I found the $20 million company, which has been generating an average cash flow of $5 million annually over the past few years.

The Business

The business appeared to be a solid opportunity. Priced at $20 million, which is four times its cash flow, it boasted around $18 million in assets, including equipment and working capital. This made it a secure investment, as the asset value nearly equaled the business price—allowing for liquidation should the business fail.

The company aligned with my engineering and construction background, and I believed I could guide it strategically. Furthermore, it employed about 100 workers, had a well-established management structure, and the current owner was looking to retire, having reduced their day-to-day involvement.

This was significant because it meant I could acquire the business without investing extensive time while still generating substantial cash flow. The owner was also grooming one of the executives to become the new president, indicating robust management was in place.

The Challenge

If you’re reading this, you likely share my interest in such a business. Who wouldn’t want to earn $5 million while only dedicating 5–10 hours each week to overseeing operations? I thought, “I must acquire this business.”

However, a significant hurdle stood in my way: I did not have $20 million. I didn’t even possess $1 million; my savings barely reached six figures. How could I possibly purchase a business without any capital?

Frustration set in. “The rich get richer,” I mused. “It takes money to make money,” and in this instance, it required a substantial amount.

I began exploring financing options. The Small Business Administration (SBA) offers loans for business acquisitions, but these are capped at $5 million, which was insufficient.

The task seemed daunting—I needed to find someone willing to lend $20 million to someone with no management experience and no capital.

The Solution

This is where capital groups come into play. These organizations collaborate with high-net-worth individuals to invest their funds and achieve high returns. Sometimes, these investments manifest as loans; other times, they are equity-based. Here’s a brief overview of both types:

• Loan-style: The capital group would lend me $20 million under specific terms (e.g., five years at 7% interest). Such arrangements are considered risky from the lender’s perspective.
• Equity-Based: The capital group would invest the $20 million in the business, structuring a “sweat equity” deal where I would act as the primary operator and earn my equity through my efforts. This type of investment aims to grow the business for a future sale, which was the option we were considering (discussed further in the Deal Structure section).

First, let me explain how I found a capital group.

Finding a Capital Group

Without any connections or direction, I turned to Google for assistance.

I searched various terms like “$20M loan for business acquisition,” “loan for purchasing business over $5M,” and “medium-sized business acquisition.” Each search yielded a couple of potential funding options.

After compiling a list of about ten capital groups, I reached out to the one that seemed most aligned with my needs and the business's requirements.

To my surprise, I received a swift response.

Initial Conversation with the Capital Group

Not long after I reached out, I had a phone call with a representative from the capital group. I shared preliminary details about the business, and they expressed strong interest.

They inquired about my background and my reasons for pursuing this business opportunity.

Following our discussion, they mentioned they would review the proposal I had sent and get back to me if they were interested in moving forward.

Again, to my surprise, they followed up and expressed a desire to continue the process. We exchanged emails and had further calls discussing potential deal structures, given my limited financial resources.

Deal Structure

We addressed the significant issue of my lack of investment capital. Surprisingly, this posed no obstacle for them. They stated that they often handle deals like this and typically structure equity through what they call “sweat equity.”

While they would fund the acquisition, I would lead the business strategically. Thus, the proposed deal structure looked like this:

• 95% Equity for the Capital Group
• 5% Equity for Me as the Strategic Lead

You might think, “5% is minimal—how disappointing!” Let’s break it down:

• 5% of a $20 million business equals $1 million.
• 5% of $5 million in cash flow translates to $250,000 annually.

Securing $1 million in equity and an annual income of $250,000 is quite remarkable, especially since I wouldn’t be investing any of my own money. Additionally, the existing management structure means I would earn that income without needing to oversee daily operations. Instead, I would collaborate with key leaders to strategize business growth.

Deal Strategy

Now, let’s discuss the strategy behind the deal. As previously mentioned, the goal of this equity-based arrangement is to eventually sell the business for a significantly higher price. Here’s the strategy breakdown:

Growing the Business by 20% Annually for 5 Years

The aim would be to increase the business’s revenue by 20% each year for the first five years. If the business started with a cash flow of $5 million per year at acquisition, the projected cash flow growth would be:

• Year 1: $6 million
• Year 2: $7.2 million
• Year 3: $8.64 million
• Year 4: $10.37 million
• Year 5: $12.44 million

As illustrated, this approach would more than double the business's cash flow. Consequently, my 5% share of annual cash flow (initially $250,000) would escalate to $622,080 per year by Year 5.

Selling the Business After 5 Years

After five years of growth, the cash flow would exceed double its original value. With the initial valuation of 4X the cash flow, the business would now be valued at an impressive $50 million!

At this point, the business would be sold—likely to another capital or equity group—with my stake also being sold.

Why This is Beneficial for Them

You might wonder why a capital group would agree to this deal. Here’s the financial breakdown:

• 95% of all profits over the five-year period would yield $42.4 million in income.
• 95% of the sale price of the now $50 million business amounts to $47.5 million.

Combining these figures means the capital group could earn $89.9 million over five years. After subtracting their initial investment of $20 million, their profit would be a staggering $69.9 million in just five years! This represents an incredible return on investment, especially as they’d only need to oversee the operation while I manage the business.

Why This is Beneficial for Me

While the advantages for me might seem apparent, let’s break down the figures for clarity:

• 5% of the profits over the five years would yield $2.23 million.
• 5% of the sale price of $50 million would equal $2.5 million.

Together, that totals $4.73 million in just five years, all without any upfront investment. Additionally, with the existing management structure, I’d only need to dedicate 10–20 hours weekly to the business. This would allow me to potentially replicate this strategy with another business, effectively doubling my profits.

Even better, there’s no debt associated with this deal.

After five years, I would walk away with substantial capital, ready to pursue further acquisitions.

Why the Deal Didn’t Materialize

You might be curious why this article mentions “almost purchased” rather than simply “purchased.” After several weeks of thorough analysis with the capital group, they concluded that the business's price needed to be reduced for them to proceed. They deemed the $20 million valuation excessive and suggested a price closer to $15 million. Unable to agree on the business's value, the capital group ultimately withdrew.

Without their backing, I could not afford the acquisition. The seller was unwilling to consider seller financing options, leading to the deal's collapse. I was devastated; I felt I had come so close to altering my life forever.

Nonetheless, I gained invaluable insights and an even greater enthusiasm for acquisition entrepreneurship through this experience.

This article is part of a series detailing my attempts to buy small businesses. Many of the pieces will include real case studies highlighting various strategies, funding options, and business scales—ranging from a $20 million enterprise to one valued at just $150,000.

Below is the list of titles for this series, complete with links to the already published articles:

1. I Tried Buying Businesses For 9 Months — Here is What I Learned
2. The Best Strategies to Acquire Businesses With Limited Capital
3. I Almost Purchased a $20M Company with $0 Down, Here’s How
4. 10X Your Net Worth and 3X Your Income by Doing THIS
5. How To Get A 300% ROI Buying a Business In The First Year
6. Watch Out For This When Buying a Business
7. The Most Important Thing to Remember in Acquisition Entrepreneurship

If any of these topics pique your interest, please subscribe or follow along to ensure you don’t miss any articles!

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