How to Buy a Business: 4 Important Factors to Consider
Key factors I consider when deciding to purchase a company.
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In a past video, you said you were going to purchase a bunch of companies this year. What are the factors you look at when you decide to buy a company?
0:10 I don't discuss that much because I don't want people knowing because it's going to create more competition, but I'll tell you what I look for, and this applies to any companies out there if you want to purchase some.
How to Buy a Business Factor #1
0:20 I look for EBITDA. At least three years worth of EBITDA. So I'm looking for three years running revenue and profit, and I buy companies for 2.5 to three times profit. And yearly profit. I won't pay a dollar more than that.
How to Buy a Business Factor #2
0:40 I also look for companies that have high expenses, and I cut down. I know that sounds mean, but it's a reality, right? I'll cut the extra expenses; I'll make it more profitable.
How to Buy a Business Factor #3
0:45 I'm also looking for companies that again, roll up and that'll fit directly into my core business. So if it's a business that adds value, even if it makes no revenue, I don't care. In other words, I'm looking for businesses in the same space that have a ton of traffic. So, for example, I bought Kissmetrics.com, the website, not the company. The blog gets million plus visitors a month. Taking that blog and I'm merging it in with Neil Patel. I paid a nice hefty chunk of change for it, I'm not generating any revenue from it, but I know I can monetize those visitors and it has similar traffic to my au****nce.
1:20 So an affordable acquisition when I look at how much revenue I can generate per visitor. It's an expensive acquisition when you look at how much multiple I'm paying, cause I'm buying zero in revenue, there are expenses, and I'm just buying the website. I don't get the revenue; I don't get the software, anything like that.
1:40 Those are the main factors I'm looking for, I'm not looking for a team to come carry over when I'm buying companies, more so, three years worth of revenue, profit, right? And I want to pay a multiple of 2.5 to three X profit.
How to Buy a Business Factor #4
2:00 The last thing I'm looking for is traffic. So anyone who's a leader in my space that I can buy, especially if they're not making much, to them, I may end up giving 'em like, few hundred grand, a half a million, million dollars and they'll be like, oh my god, I got a million bucks when I'm losing money. I'm like, yeah, no problem, cause look, you know, get rid of the team, I know this sounds ruthless but sadly, sometimes this is what business comes to, and I'll take everything, and I'll merge it over into my core site.
2:20 Now, of course, if there are talented people on that team, I'll take them over, or I'll try to find them a job. Any time I let someone go, I go above and beyond to hit up other people I know and go to bat for those people and try to place them in another job. But that's my strategy when it comes to buying businesses and when I do that, I want to be the largest in my space, so I'll keep purchasing other people to be the largest because once you're the largest, the amount of multiple that you get on valuation is much more substantial.
2:40 So a lot of times, companies will be worth three, four X, five X profit, sometimes even three, four, five X revenue. But if you're the leader in the space, sometimes you're worth 10, 20 X revenue. So I'll buy a lot of smaller players up for cheaper, merge them all in, I'll be the most significant player, and I'm doing arbitrage on the multiple. That's my strategy with acquisitions.
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