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502: Should You Buy a Business?
Podcast: Download
Lately, I’ve been thinking about starting a new business. I know the market seems like it’s crashing around us, and we’re probably headed into a recession. But hey—I started my first business back in 2009, and it doesn’t get much worse than that, right?
Well, maybe it can. And that’s exactly why I’ve been considering buying a business instead of starting one from scratch, particularly because of the SBA loan options available right now.
Here’s how an SBA 7(a) loan breaks down for a $1,000,000 business purchase:
Total Loan Amount: $1,000,000
Typical Down Payment (10%): $100,000
Amount Financed: $900,000
Loan Term: 25 years
Estimated Monthly Payment (at 10.25% annually): $8,200
Now, that monthly payment isn’t exactly cheap. But consider this: a business selling for $1 million typically goes for about three times its annual earnings. For those of you from the real estate world, that translates to what we’d call a cap rate of about 33.33%. And remember—anytime your cap rate exceeds your interest rate, leverage works in your favor.
Let’s break down the numbers clearly. With annual earnings of $333,333 ($1,000,000 divided by 3), and an annual debt service of about $98,400 ($8,200 x 12 months), your annual cash flow comes out to around $234,933. Since you only invested $100,000 to get this cash flow, you’re looking at a cash-on-cash return of about 235%.
Pretty impressive, right?
Of course, the devil is always in the details. One reason I’ve never pulled the trigger on buying a small business like this is because, as someone who’s started businesses myself, I know firsthand just how volatile small businesses can be.
Often, their success hinges on key factors that don’t necessarily transfer smoothly to a new owner.
Think about it—if small businesses were all this easy, why would anyone ever bother buying anything else?
That said, my guest on this week’s Wealth Formula Podcast strongly advocates for buying existing small businesses and believes most people are overlooking a fantastic opportunity. He makes a compelling case—one that might just have you checking out business listings yourself.
Curious? Make sure you tune into this week’s Wealth Formula Podcast and see if buying a business might be the right move for you!
