How to Buy Businesses: Secrets of the Wealthy

TL;DR

You can buy businesses with limited personal capital by using a leveraged buyout, which combines other people’s money with an acquisition that gives those funders a percentage. The speaker argues that buying existing profits is easier than building them one client at a time and points to holding companies with more than 20 individual companies as a model for acquisition-led growth. Read on to understand the playbook and its underlying logic.

Transcript

if you guys don't know how to buy businesses if you don't know Acquisitions if you don't know deal making I think you're [ __ ] up we are at all time low levels for ownership in this country the big keep getting bigger and the little guy gets hammered what do you think that does to our society at large if we allow only a few to own we are putting o... Read More

Key Insights

• Leveraged buyouts (LBOs) allow you to acquire businesses using other people's money.
• The wealthy often grow their wealth by acquiring businesses rather than starting from scratch.
• Many small businesses are available for purchase due to retiring Baby Boomers.
• Seller financing is a common method for acquiring small businesses, involving future profits.
• Recession periods present opportunities to buy businesses at lower valuations.
• The key to successful business acquisition is understanding deal-making and structuring.
• It's important to buy businesses that align with your skills and interests.
• Raising prices and adding technology can significantly increase a business's profitability.

Questions & Answers

Q: How can you buy a business without putting up all the money yourself?

Use a leveraged buyout, or LBO, to fund the acquisition with other people’s money. Those funders receive a percentage, while you avoid putting all of your own capital at risk.

Q: What is a leveraged buyout (LBO)?

The speaker defines an LBO as using other people’s money to buy an asset for yourself. You retain an ownership interest while giving the people providing the money a percentage of the deal.

Q: Why does the speaker say buying profits is easier than building them?

Buying a profitable business gives you access to profits that already exist. The alternative presented is growing one client at a time, which the speaker considers harder than acquiring established profits.

Q: How do wealthy business owners grow through acquisitions?

They buy companies, place them within holding companies, and combine them to create leverage and scale. The goal is for the combined businesses to be worth more together than their individual parts.

Q: What is the private equity playbook described here?

The playbook is to acquire established businesses rather than rely only on organic, client-by-client growth. It uses deal-making, leverage, and scaling to grow the acquired companies and pursue a larger exit.

Q: Why are holding companies important to this acquisition strategy?

Holding companies allow an owner to control multiple individual businesses rather than focus on only one. The speaker cites a holding company with more than 20 individual companies as evidence that successful owners can acquire, combine, and scale many businesses.

Q: What skills does the speaker say aspiring business buyers need?

Aspiring buyers need to understand acquisitions, deal-making, accounting, and finance. The presentation promises 10 steps and emphasizes taking notes when the material becomes technical.

Q: Why does the speaker connect business acquisitions with broader ownership?

The speaker says ownership is at an all-time low in the country while large owners keep getting bigger and smaller participants get hurt. Teaching more entrepreneurs to buy businesses is presented as a way to prevent ownership from becoming concentrated among only a few people.

Summary & Key Takeaways

• Leveraged buyouts (LBOs) are a key strategy used by wealthy individuals to acquire businesses with minimal personal investment. By leveraging other people's money, you can purchase profitable businesses and scale them effectively. This approach is particularly valuable during economic downturns when many businesses are available for acquisition at reduced prices.

• Many Baby Boomers are retiring, creating a surge in small businesses for sale. This generational shift presents a unique opportunity for aspiring business owners to acquire established businesses. Seller financing is a prevalent method, allowing buyers to use future profits to pay for the business, making acquisitions accessible even without substantial upfront capital.

• Successful business acquisition involves understanding deal-making and structuring. By focusing on businesses that align with your skills and interests, you can maximize your chances of success. Implementing strategies such as raising prices and integrating technology can further enhance the profitability of acquired businesses, contributing to personal wealth and community growth.