post 2 10 13 The roll up
The Roll Up
By KC Truby How to Buy -‐ Fix and Sell small companies with annual sales of $250,000 to $10,000,000 That are in trouble. From Lonesome Cowboy Publishing Inc.
Box 2254, Casper WY 82602
Phone 866-586-2144 Email [email protected]
Mission: To help entrepreneurs, professionals and vendors put together deals that save small companies in trouble at high profit. Basic premise of this report: How the 'Roll Up' works. Smaller companies have a very low multiple of OCF (owners cash flow)many times selling at 1/2 to 2 times annual cash flow. Larger firms, with sales over $10,000,000 per year, will often sell for 10 times annual cash flow. Disclaimer: All of the case studies you read here are modified enough that even the seller would not recognize themselves in the case study. That is to protect our buyers, vendors and sellers that are always under strict NDA (non-‐disclosure agreements.) They are presented here as 'stories' to give you a clear idea of what is possible and what others have already done. The story: This is my personal roll up plan to create $19,000,000 in personal wealth using the roll up concept. Rolling up is one of the easiest ways to create wealth. Before we start I will acknowledge that any business idea that creates 19 million in wealth in 5 years is fraught with fail points. However if I'm only 10% right, I still have enough to retire on so were moving forward. I'm currently in negotiation to purchase a 'home health care' business. That’s where a nurses aid is sent to some ones home to help them bath, eat and dress. We call it Nanny's for Granny's. The gross margins are about 50%. So you pay your staff an average of $10 an hour and bill that person out at $20. Pretty simple so far. But the management and sales cost are high so the average small firm nets 20% after all cost are considered. Lots of nurses start these type of companies but get bogged down at a million in sales with management duties and they can't grow further. Since managing a business is so different then working in a hospital many of the owners get tired of the stress after a few years and want to sell. The idea of walking away with a cool $500,000+ and going back to their $75,000 job is pretty enticing to the burnt out nurse who did not know running a business was so hard. Now a home health care business doing $1,000,000 will sell for an average of three times net profit. Our $1,000,000 prospective acquisition is for sale at around $600,000. I'm working on SBA financing at 75% and the owner is carrying back 15% so I will need to come up with 10% or $60,000 in cash at the closing. To reduce the down payment even further I will talk the business broker into lending me half his $60,000 commission so my total out of pocket will be around $30,000. Not bad for a business that nets $200,000 a year. The debt service will be under $10,000 a month so I will cash flow the acquisition immediately. If I really play my cards right I will even be able to find an investor to cover the $30,000 in hard cash I'll need at the closing but we'll leave that discussion for a later time. So far, so good as I can always put the down payment on a credit card if I need to. So here is how this deal works out to create major wealth. The $1,000,000 business (the average for those up for sale) sells for 3 times profit, but here is the kicker. That same type of business doing $10,000,000 in revenue is attractive to national health care chains and they will pay ten times profit. The 'big boys' have no interest in the small $1,000,000 firm but they have a big desire for the larger companies with systems, sales people and managers in place. So over the next five years I plan to buy 2 of these $1,000,000 companies a year all in one state. There are 46,000 of them across the US and a lot come up for sale every year so it won't be that hard to pull off 10 acquisitions. So with 10 of these I will have borrowed $5,700,000 in total and used cash flow from acquisition one to pay the $30,000 hard cash needed on acquisition two and so on and so on as we roll up. This is a great deal so far. Especially since I've done nothing to increase sales. All I really plan to do over 5 years is condensed the management into one central office. It will probably make sense to cut back on the sales efforts to just enough to keep the numbers level from client attrition. Between consolidating administrative tasks and the reduced sales force I will be able to jump the net income to 25%+. When I have my 10th acquisition done the combined companies will now generate $2,500,000 annually in net profit before EBIDTA. My debt service is covered and I'm spinning positive cash flow out of the operation. Now it gets fun With a combined revenue of $10,000,000 all I need to do is announce to the national health companies who want to expand in my state that I'm available. My suitors will immediately see the 'lost opportunity' from our poor sales force and will predict they can bring in their 'guns' to double sales quickly. Good for them. This easy 'fix' from their point of view will make my firm desirable. Remember my goal was not to build sales, but to build a roll up, slash administrative cost and sell out. Since my combined profit from ten health care companies is now $2,500,000 EBIDTA and the national firms are willing to pay ten times profit for a company of this size my company value just jumped to $25,000,000. At the sale I will pay off the remaining $5,700,000 in SBA loans and I will have already recovered my $300,000 out of pocket cash investments from the daily cash flow. So my net profit on this roll up will be around 19 million taxed at capital gains rates 1,000 things can go wrong with this plan. Of course, but 1,000 things go wrong in any business like doing $500 tax returns in an accounting office. If you had a choice where you put your time and effort, where would you go? Do you create a small accounting office doing 200 returns that sells for 1.25 times billing on a 3 year 'earn out' so you hopefully get $125,000 or do you put in the same amount of effort rolling up 10 home health care companies (or some other type of business) with the possibility of creating 19 million. By the way -‐ You have just learned why my wife and I are leaving accounting. Our opportunities in accounting are smaller than our capabilities. We are bigger than $500 tax returns. We have realized that every task, skill and function of this planned roll up is nothing we have not been doing for years on behalf of our clients while billing $85 to $150 an hour. The clients get rich, we get $150. So we are using the Roll UP to become the client.