Buying a business can be a great way to build wealth, but it's important to understand the risks and rewards of such an endeavor. In this article, we'll discuss the story of Joe, a salesperson who wanted to buy his own business, and the mistakes he made that led him to buy himself another job. We'll also discuss the recipe for success when it comes to buying a business, and how to avoid making the same mistakes Joe did.
Joe was a successful salesperson who wanted to buy his own business. He found a broker named Bob, who had been doing this for 20 years, and Bob sold Joe on a business that was valued at a million dollars, with $250,000 in Seller's Discretionary Earnings (SDE). Joe was excited and didn't get a second opinion from advisors or CPAs, so he moved ahead and closed the deal.
Unfortunately, Joe quickly found himself in over his head.
He was working 70 hours a week, not seeing his family, and not making the money he thought he would.
He went to his CPA for help, and the CPA explained that Seller's Discretionary Earnings is not always money that can be used to pay bills. It's a number that backs out maintenance depreciation and other costs associated with running a business.
After evaluating the business, the CPA let Joe know that the business was really only worth about $500,000, and that he would need to invest an additional $500,000 worth of equipment to make the business profitable enough to make the kind of money that Joe had hoped for.
Joe was devastated. He had made a huge mistake.
The Moral of the Story
The moral of the story is that it's important to understand the earnings of the business and the concept of Seller's Discretionary Earnings before making a purchase. If you don't, you could end up buying yourself a job that's hard to quit.
The Recipe for Success
The good news is that there is a recipe for success when it comes to buying a business. It requires humility, patience, and checking your ego at the door. There are steps you can take to buy a great business, run it, grow it, and sell it.
If you want to learn more about how to buy businesses, value businesses, and grow your wealth through acquiring small and medium-sized businesses, check out what we're doing at Deal Camp. We have lots of free resources to help you get started.