Take a Look At This Veteran-Owned Business For Sale
$14 million in revenue and $2.5 million in cashflow and it needs a veteran to buy it.
I’ve published a number of posts and podcasts talking about buying businesses, and have been wanting to do a breakdown of a business and how you might approach buying it.
Just yesterday- I got a notification about a veteran-owned Department of Defense contractor for sale and it looks like a great deal for me to dig into for this audience. I’ll take you through how I would start evaluating this business and what I would want to know. I will then share a basic model you can use to think about how you could structure the deal.
Where is it listed?
This business is being sold by a broker.
The first thing to understand with anyone who is involved in a deal is what are their incentives.
The broker doesn’t really get paid until they sell the business, where they usually end up making 10-15% of the transaction price.
So if this business sells for their listed price of $12,000,000 then the broker stands to make $1.2 - 1.8 million.
I’ve talked to a lot of people who have bought and sold businesses before. The general advice that I hear is that for a first-time buyer, trying to buy a business that is represented by a broker is the best option. Why? The broker is there to help coach the buyer through the sale process and (if they are a good broker) keep the seller’s expectations about how much their company is worth in check. Without a broker involved, you may have to do this with the seller and that can be incredibly difficult if this is your first time.
For what it is worth, I have worked with this brokerage a few times. I’ve made an offer on 3 of the businesses they have represented and am currently under offer for one right now. I’ve found them to be very reasonable and professional people.
I don’t make a dime off saying that or writing up this post. I just wanted to share it with you all.
Ok, but the price?
You might be thinking to yourself:
“Mark- this business looks good and all but I don’t have $12 million.”
Don’t worry- we will cover how you might put together the money later, but let’s talk about the price for now.
Businesses listed for sale are not an item on Amazon. EVERYTHING is up for negotiation.
A business for sale is usually valued based on a multiple of cash flow. In this case, the broker lists $2,572,171 as the cash flow (and I am assuming that is for 2023).
So if they are asking $12,000,000 then that means they’re asking for a 4.67x multiple ($12,000,000/$2,572,171).
Generally speaking, businesses doing less than $3 million in cash flow sell for 3-5x. So, ok, we are in the normal band here. The fact that they are doing ~$2.5 million and toward the higher end of that spectrum makes them more valuable, so asking for a slightly higher multiple here is on par.
Here is why I would come in with a lower offer, though:
This is a Service-Disabled Veteran Owned Small Business (SDVOSB). On the one hand, that can be great. That means this business may not have as much competition for their contracts because they compete for set-aside contracts, or their prime contractor really likes them because they help them fill their SDVOSB spending goals.
On the other hand, it makes it really hard to sell this business down the road. This matters for a few big reasons:
If you use investors to acquire this business (and for one this size, you likely will have to), investors’ returns are primarily driven by the re-sale of the business. It depends on how much you grow the business and issue dividends, but that’s usually how the math shakes out. If your plan is to re-sell in 5-7 years, you will have a tough time finding a buyer to sell this business to as they need to be a service-disabled veteran AND have the wherewithal to put together a deal of this size. I’m here to tell you that there are not a lot of those people.
If you can approach the seller with a deal that works, and you are a service-dibbled veteran, then you can have a lot of negotiating power.
It looks like you may need a clearance also for this business, which just adds even another layer of difficulty to selling it.
All that is to say, might come in at $10 million and see if they bite.
What about the business itself?
Whoa. We just did all that thinking and haven’t even gotten past the headline of the listing yet. So let’s take a look at what the business actually does.
They are primarily an ERP integrator for SAP.
Ok, I’m sure I lost probably everyone there. Don’t worry- I didn’t know what exactly that meant either.
First, who is SAP? They are a $221 billion company that helps other companies operate their business through software.
What is ERP? According to SAP:
“Enterprise resource planning (ERP) is a software system that helps you run your entire business, supporting automation and processes in finance, human resources, manufacturing, supply chain, services, procurement, and more.”
Ok- just think of this all as a business finding a way to automate as much back-office stuff as they can.
Makes sense?
So basically, this business helps clients implement SAS ERP software. They list 60 employees, most of whom (I’m guessing) are contractors on-site with DoD helping with these systems.
Here’s the thing- right now you don’t need to understand what they do exactly. All that can start to make more sense after you speak with the broker and then the business owner.
Where is the value?
Literally when I sat down to write this, one of my friend texted me this exact listing asking, “Have you seen this?”
He’s a former hedge fund analyst and is now searching for a business to buy, backed by some uber-wealthy investors. He has professional investors with decades of experience around him, so when he speaks about a business, I listen. This is the gist of what he told me:
“Implementers (like this business) are usually recommended and then ranked within the software parent. This means other customers can come in and look through implementers just like you would look through Angie’s List for a plumber. The better you are, the more work you get.”
He also mentioned that this business stands out because they have a niche (working with DoD contractors).
So looks like this might be a solid business.
I have some questions about the financials
Let’s take a look at their financials (to see more I would have to sign an NDA)
So on one hand, we see general growth since 2020. That’s good. In fact, since 2020 the business doubled its revenue and 3xed its earnings, which means it got MORE profitable as it grew. That’s great.
But why the dip in earnings in 2021? I see they grew revenue so maybe they spent some money on business development or software upgrades. And then they almost 4xed earnings from 2021-2022. Again- why?
Look, you shouldn’t look at any of this and automatically think something shady or bad for the business is happening. It could all make total sense once you look at their profit and loss statements and see where the money went.
Point is- it’s something to dig into.
How might you structure this deal?
Having just looked at the listing, it’s still too early to make an offer, but with a deal this size you can start thinking about it.
If it were me, here’s my back of the napkin deal I’d have running in my head.
What is DSCR? That’s your Debt Service Coverage Ratio. Basically- how much money the business makes relative to how much money is owed. The most conservative banks don’t like to see anything below 1.5 but banks like Live Oak will go down to 1.4 for government contractors, so this deal still pencils out.
Important to note here- this model does not include stuff like legal fees, hiring an accountant to check their books, and closing costs with the bank, but this is totally doable. I made this in like 5 minutes so cut me a break.
SBA lenders like Live Oak Bank will issue you an SBA loan (which maxes out at $5 million) and then follow up with a secondary loan, which is how you can get that second $1 million loan.
Raising $1.5 million is nothing to sneeze at, and this gets complicated when it’s an SDVOSB, but it is doable.
Conclusion
Look- I haven’t even looked at this deal seriously. I have not signed the NDA and looked at their in-depth materials. And there are a lot of assumptions baked into my model. I don’t know everything going on here by ANY means.
But I can see that this deal is possible. There is a path to someone owning a business that produces $2.5 million in cash flow a year for a reasonable price.
Go crush it.
-Mark
P.S. If you want to take a run at this, my friend I mentioned said he would happily talk to you about these types of businesses. I’m also willing to help you out in strategizing and connecting with potential investors.