How to Find Businesses for Sale Highest Cash Flow

Summary

In this video, business broker and commercial lender Leo Landover teaches viewers how to calculate cash flow for a business purchase using his Deal Analyzer workbook. He uses a live business listing as an example, discussing the importance of understanding the type of cash flow (SDE, EBITDA, etc.) and analyzing the deal's financials, including the asking price, revenue, and seller financing options. Leo emphasizes the significance of cash flow post-purchase and how it can replace a day job income, providing a comprehensive guide for potential business buyers.

Takeaways

• 💼 The video is a tutorial on how to calculate cash flow for a business using a deal analyzer workbook.
• 📈 The presenter, Leo Landover, is a business broker and commercial lender who helps buyers purchase profitable businesses.
• 💰 The example given is a boat rental company with an asking price of $820,000 and a cash flow of $320,000.
• 🔍 The video emphasizes the importance of understanding the type of cash flow being presented, such as SDE (Selling Discretionary Earnings), EBITDA, etc.
• 🏢 The business has been operational since 1984, indicating a long-standing and potentially stable business model.
• 💲 The presenter discusses the potential for seller financing and the implications it has on the deal's financing and cash flow.
• 📊 The video includes a detailed analysis using a deal analyzer tool, which compares the seller's asking price with the buyer's potential costs and cash flow.
• 🏦 The presenter explains the concept of Debt Service Coverage Ratio (DSCR) and how it affects the viability of the business purchase.
• 📉 The video also covers the impact of different financing scenarios, such as SBA loans and seller carryback loans, on the buyer's cash flow.
• 📈 The potential for high cash on cash returns and cap rates is highlighted, especially when leveraging financing to minimize upfront investment.
• 🎁 The video concludes with an offer for viewers to obtain the deal analyzer tool used in the tutorial for free.

Q & A

What is the main focus of the video?

The main focus of the video is to demonstrate how to calculate cash flow for a business using a deal analyzer workbook, with a specific example of a boat rental company.

Who is the host of the video?

The host of the video is Leo Landover, a business broker and commercial lender.

What is the asking price of the boat rental company mentioned in the video?

The asking price of the boat rental company is $820,000.

What is the reported cash flow of the business?

The reported cash flow of the business is $320,000.

What does the acronym 'SDE' stand for in the context of the video?

In the context of the video, 'SDE' stands for 'Selling Discretionary Earnings', which is an estimate of the cash flow available to a business owner.

What is the significance of the business being in operation since 1984 as mentioned in the video?

The significance of the business being in operation since 1984 is that it indicates the business has a long history, suggesting stability, established customer loyalty, and goodwill.

What does the video suggest about seller financing?

The video suggests that seller financing can be a good or bad sign depending on whether the seller can justify their cash flow via tax returns. It advises caution and careful analysis of seller financing deals.

What is the role of the management team in the business as discussed in the video?

The video highlights that the business has a self-sufficient management team, which implies that the owner is not required to be heavily involved in day-to-day operations, allowing for absentee ownership.

What is the significance of the business being a 'tour and rental' business as per the video?

The significance is that the business combines both rental services and tour operations, which may affect its valuation and the way potential buyers evaluate the deal.

What is the importance of the 'Deal Analyzer' tool mentioned in the video?

The 'Deal Analyzer' is an important tool because it allows potential buyers to analyze and compare financials of a business deal side by side, helping them make informed decisions about purchasing a business.

What is the potential monthly cash flow from the business after servicing the debt as discussed in the video?

The potential monthly cash flow from the business after servicing the debt could be approximately $17,500, based on the calculations presented in the video.

Outlines

00:00

📈 Introduction to Deal Analysis for Business Acquisition

Leo Landover introduces a video tutorial on how to calculate cash flow for a business purchase using his Deal Analyzer workbook. He emphasizes the importance of understanding cash flow to replace one's day job income and offers a step-by-step guide. Leo, a business broker and commercial lender, focuses on assisting small business owners and W-2 employees looking to buy profitable businesses. He discusses the need to analyze deals from different perspectives, considering factors like the asking price, cash flow, and financing options such as seller carry or SBA loans. The video also mentions a specific business for sale, a boat rental company, with an asking price of $820,000 and a cash flow of $320,000, highlighting the ambiguity around what exactly constitutes cash flow.

05:01

🏢 Analyzing the Boat Rental Business Deal

The video delves into the specifics of the boat rental business for sale, discussing its strong cash flow and long-standing presence in the market since 1984. Leo appreciates businesses with a proven track record and the ability to generate loyalty and goodwill. He also touches on the potential benefits and risks of seller financing, suggesting caution due to the possibility of inflated or inaccurate cash flow figures. The video outlines the business's operations, including airboat tours, dolphin watching, and manatee swimming, and mentions the separate consideration of real estate in the deal. Leo uses his Deal Analyzer to compare the asking price, revenue, and cash flow, calculating a 2.56 multiple of the seller's discretionary earnings (SDE), which he considers a good sign.

10:03

💼 Financial Breakdown and Market Comparison

Leo continues the analysis by discussing the financial aspects of the deal, including the seller's willingness to finance up to 70% of the purchase price and the implications of different loan terms on cash flow. He calculates the annual debt service and the debt service coverage ratio, emphasizing the importance of these figures for both the buyer and the bank. The video also compares the business's valuation multiples to industry standards, suggesting that the deal is competitively priced. Leo offers strategies for negotiating the purchase price based on market comparisons and discusses the impact of different down payment scenarios on cash-on-cash returns and cap rates.

15:05

📊 Final Thoughts on the Business Acquisition Deal

In the concluding part of the video, Leo summarizes the financial analysis and reiterates the strong cash flow potential of the boat rental business. He highlights the attractiveness of the deal, especially considering the high cash-on-cash return and cap rate. Leo also mentions additional tools and resources he uses for a comprehensive deal analysis, including personal cash flow analysis and global debt service calculations. He invites viewers to reach out for assistance with business acquisitions and announces a limited-time offer to give away his Deal Analyzer and cash flow calculator to subscribers.

Keywords

💡Cash Flow

Cash flow refers to the net amount of cash and cash-equivalents being transferred into and out of a business. It is a measure of the availability of cash to run a business. In the video, the speaker uses cash flow to evaluate the profitability of a business for sale. The script mentions 'cash flow' multiple times, emphasizing its importance in determining whether a business is a good investment, as it can replace one's day job income.

💡Deal Analyzer Workbook

A deal analyzer workbook is a tool or template used to systematically evaluate the financial aspects of a business deal. In the context of the video, the speaker demonstrates how to use their own deal analyzer workbook to calculate cash flow for a business for sale. This tool helps potential buyers to understand the financial implications of purchasing a business.

💡Business Broker

A business broker is an intermediary who helps in the buying and selling of businesses. The speaker introduces himself as a business broker, indicating his role in facilitating transactions and providing expert advice on business deals. His expertise is crucial in guiding viewers on how to analyze and evaluate business opportunities.

💡W-2 Employee

A W-2 employee is an individual who receives a W-2 form from their employer, indicating that they are an employee with taxes withheld. The video mentions W-2 employees who are 'trapped in the rat race' as potential buyers of businesses, suggesting that purchasing a business could offer a path to financial independence and control over one's income.

💡Seller Financing

Seller financing is a method of funding where the seller of an asset provides all or part of the financing. In the script, the speaker discusses the implications of seller financing, noting that it can be a good or bad sign depending on the seller's ability to justify the cash flow via tax returns. It's a significant aspect of the deal analysis as it affects the buyer's financial obligations and risks.

💡SDE (Selling Discretionary Earnings)

SDE stands for Selling Discretionary Earnings, which is a measure of cash flow that owners can potentially realize from the business. The video script assumes the cash flow mentioned is SDE, indicating the owner's discretionary earnings that could be affected by their personal financial decisions. This is a key metric in evaluating the financial health of a business for sale.

💡Amortization

Amortization refers to the process of paying off a loan by making regular payments over a set period. In the video, the speaker calculates the annual debt service assuming a 10-year amortization period, which influences the monthly payments and the overall attractiveness of the business deal.

💡Debt Service Coverage Ratio (DSCR)

DSCR is a financial ratio that indicates the adequacy of a borrower's operating cash flow to meet their debt obligations. The video discusses the DSCR as a key indicator of the financial stability of the business post-purchase. A high DSCR, such as the 'four to one' mentioned, suggests that the business can comfortably cover its debt payments.

💡Cap Rate

The capitalization rate, or cap rate, is a measure of a real estate investment's profitability in terms of the income generated by the property. In the video, the speaker calculates the cap rate to illustrate the return on investment for the business. A higher cap rate, such as the '42 percent' mentioned, indicates a more profitable investment.

💡Multiple of Cash Flow

A multiple of cash flow is a valuation method where a business's value is calculated as a multiple of its cash flow. The video discusses the concept of using multiples to evaluate the asking price of a business. The speaker references industry standards for multiples, such as '2.41 multiple of SDE,' to determine if the business is priced fairly.

Highlights

Introduction to calculating cash flow using a deal analyzer workbook

Demonstration of analyzing a specific business for sale

Explanation of how much cash flow is available after purchasing a business

Potential for a single deal to replace one's entire day job income

Importance of analyzing deals from a buyer's perspective

Discussion on the ambiguity of cash flow figures and what they might represent

Assumption that the cash flow figure represents Selling Discretionary Earnings (SDE)

Analysis of a boat rental company business with a 40-year history

Presentation of the business's asking price and cash flow figures

Consideration of the business's longevity as an indicator of stability

Discussion on the implications of seller financing and its potential risks

Details on the business's operations, including airboat tours and dolphin watching

Explanation of the Deal Analyzer tool and its use in comparing business figures

Calculation of the business's price multiple based on SDE

Discussion on the potential for seller financing and its impact on down payment requirements

Analysis of the annual debt service and debt service coverage ratio

Market comparison and the importance of understanding industry valuation multiples

Calculation of cash on cash return and cap rate with different down payment scenarios

Offer strategies based on market multiples and potential negotiations

Final thoughts on the attractiveness of the business deal and its potential as a profitable investment

Offer of a free deal analyzer tool for subscribers

Transcripts

by popular demand in today's video I'm

going to show you exactly how I

calculate cash flow using my deal

analyzer workbook on just about any

business for sale out there I'm going to

give you a specific example and I'm

going to show you how much cash flow is

there after you buy the business and in

one deal alone could replace your entire

day job income let's get to it

[Music]

everybody Welcome to my channel I am

your host Leo Landover business broker

and Commercial lender helping you buy

and scale a profitable business if you

are a small business owner looking to

scale your business by buying another

profitable business or if you're a W-2

employee trapped in the rat race wanting

to get out by purchasing a profitable

business you are in the right place

please subscribe to my channel don't

forget to hit the Bell you'll be

notified every Thursday when a new video

comes out just about every week I get um

emails

um

from viewers just like you ask me to

analyze deals and um and I get emails

every just about it several times a week

um asked me to analyze deals so I wanted

to do it again and this one is actually

from Biz by cell and the the the the

whole objective of this video is

actually how to teach you how to analyze

deals by yourself because regardless

everything has it's in perspective it

doesn't really matter what the asking

price or the cash flow is will it work

for you will it cash flow if you need to

get some debt whether it's seller carry

or a SBA loan you're gonna have to

finance a deal if the deal doesn't make

sense after you get some debt uh

financing then then basically you waste

your time so this I'm going to analyze

this deal that I've already run the

numbers but I want to teach you guys how

to go about doing this this is straight

out of this by sale and this video is

actually

um this listing is actually alive this

is a live listing it's actually for sale

you can you know you can actually Thomas

Peter is the actual uh broker uh we're

we are recording this video February 28

2020 uh three and this is a live deal so

if you want to go for it that's fine

I'll tell you what I like about it and

then we're gonna look at the numbers

side by side and so you can have make an

educated decision so with that said

boot rental company uh

business for 40 years

um so here are some of the the numbers

the one 820 000 that's the asking price

with a cash flow 320 000. now

cash flow is such a ambiguous area uh

what we don't know right now is whether

the cash flow is selling discretionary

earnings or is it ebitda or is it just

net income was it ebit earnings before

interest in tax we don't know that but

let's assume that that would be the

owner's own cash flow so let's assume

it's sde for selling discretionary

earnings so here's what I like about it

very healthy cash flow at least on paper

um is basically the cash flow is almost

like 30 cents for every dollar of

revenue revenue one uh million and cash

flow this is a well-run business here's

one thing I like about it in business

since 1984.

so 39 40 years uh in business which is

what it says here so I like businesses

that have been around for a long time

they already worked out all the kings of

any startup that they've been able to

build loyalty and Good Will over a long

period of time and basically what you're

taking it off is you're taking it off in

owner stands for we're going to find out

why

so let's read on I do like the fact that

it's seven up to 70 on our finance now

when it an owner is willing to finance

could be really really good or really

really bad

um and it's really really bad if if they

cannot justify their cash flow via tax

return so you cannot get an SBA loan so

then you start doubting whether the

numbers are real so I I say that look at

the seller financing with with uh

with a magnifying glass uh and be very

cautious of it but at least on paper it

looks I'd like it if it makes sense okay

I'm gonna show you why uh this deal this

is a fantastic opportunity for a buyer

to acquire recognized boat rental and

tour business in Citrus County uh so

this is Florida 40 years profitable

clearly airboat airboat dolphin watching

and manatee swimming uh tour business

enjoys so this is a tour business okay

um

so I'm just trying to figure out which

category we're going to push it up when

we do the evaluation so it's both rental

and tour okay so not all the next you

know the the the codes or the SIC codes

show up in the valuation so we got to

figure out which one we're gonna Peg

ourselves to

um there isn't real estate involved but

it is not for sale it is not part of

this deal it's a two-acre commercial

property for sale at least now if it was

to be lease that would be an agreement

it would be a lease agreement that the

buyer would have with the seller the

seller gets to keep the real estate

portion and you get to lease it back to

them in a five-year

um lease agreement or such

um if the if the seller is willing to

sell it to you that would be a separate

transaction different transaction from

the business so it will be two different

deals closing concurrently

um and that's a play if you want to uh

some people I know some people are

always interested in and almost always

looking at deals and buying the real

estate

I don't think that should be uh your

only you know if the business makes

sense on its own and what happens when

you grow you may outgrow the real estate

so not you buying the risk real estate

is not always a good thing so anyway so

there's there's some property there's

there's there's real estate involved

I like the fact that there is a

self-sufficient management team spells

out absentee ownership

uh or say my absentee owners anytime

that you have a management team in place

means less work for you for the owner

you're truly buying a business you're

not buying yourself a job so that as as

I talk about in my videos often uh okay

so

the facilities is to acre with three

buildings

um

now although the real estate portion is

it's it's a separate deal what would be

for sale are they we're going to have to

look at the assets which doesn't you

know a listing a business listing in

bits by sale or any other uh business

websites not necessarily going to tell

you what all the assets that are

involved

um I'm assuming I'm going in thinking

I'm going to do an asset purchase not a

stock purchase what regardless of

whatever legal entity they have it's

going to be an asset purchase so we're

going to purchase the assets we're going

to cherry pick the assets of the

business along with the Goodwill and

we're going to figure out how much

that's worth to us but it's only worth

to us if it's generating enough cash

flow you need the assets to generate the

cash flow okay so so far so good so

let's go ahead and put this side by side

here and what you're looking at here is

my deal analyzer I have a buy side deal

analyzer that I have perfected over a

period of time I've been working on this

type of situation for years analyzing

deals and I started coming up with my

own assets this is my intellectual

property so

um what we've done here is we're putting

the the the numbers side by side so 820

000 is the asking price this is coming

from the seller side this is going to be

our side and we're going to compare it

side by side

820 000 on a million ten thousand in

revenue and we have the straight from

the listing at three hundred and twenty

thousand dollars worth of cash flow but

it sells me right away this is a 2.56

multiple of sde now you know from me

from all my videos that it's all come

all businesses I'll say 90 plus percent

of business itself or a multiple or

either sde or ebitda if it is a business

less than half a million dollars worth

of cash flow it would be sde in this

case I like what I see I like 2.56

let's move on this is what the deal is

as per the uh the seller they're saying

that they're willing to finance up to 70

percent of the deal or 574

000 on 820 000 which means that you

would have to come up with 30 down or

two hundred and forty six thousand now

if you have that cash flow and you get

the seller to carry it then you're not

in an SBA loan and that may be good it

really depends right we don't know

enough

um this is the annual Debt Service what

I've done is I usually I usually

calculate right right away I make some

assumptions now this is if if uh if I

would want the interest rate to be no

more than seven percent uh over a

10-year amortization but demorization

may be less if the amortization is you

know 60 months which is five years it's

gonna change our numbers drastically now

what I like about the SBA when they're

funding deals is that they actually have

a 10-year amortization which means it

lowers your interest in principal

payment over a longer period of time

which helps you with cash flow and this

is all about post closing cash flow in

liquidity for you so but you know this

is mirrors the SBA so of course you know

at 10 years to pay a seven percent

interest rate your payments will be 79

000 a year of principal and interest to

the owner which means you have a debt

service coverage ratio of four to one

that is fantastic that is amazing I

doubt that it's going to be that because

no seller is going to want to carry a

deal for 10 years and most likely going

to be uh 60 months okay and if it is 16

months we want to try to see if we can

get it at five percent uh which means

it's gonna so you can everything is

negotiable

uh so even the note for the seller would

be part of the deal that you would have

to negotiate uh and you can build in

some contingencies some Club back

Provisions if something doesn't perform

what I like about seller carry deals is

that you have a little control if the

business does not perform and the seller

has to be very confident in their

business to back up a seller note

so all things considered right now there

is something else here now so beer is in

the eye of the beholder of course we go

to the market if you do but figure out

try to figure out what the other

businesses like it are selling for in

this particular case we want to know hey

what does the so what I'm going to show

you guys here is you're stuck and trying

to figure out how to actually buy a

business

let me help you I do this every week and

I love to help buyers acquire their

first business all you have to do is

drop me a comment below

or send me an email my email address

will be in the description section of

this video let's work together creators

okay which is what they are right

they're they're a tour company uh this

gives you the size of the industry the

next code the SIC code the number of

businesses out there the analyze revenue

of the aggregate of all those businesses

in the marketplace

I what I want to see is the rules of

thumb well how much of the businesses

this business are selling for two times

sde for smaller companies two to four

times sde for I would imagine bigger

companies three to five times ebitda or

three times ebit

this is a business that is under 1

million in net sales which is the

valuation medium value uh it says 2.41

uh multiple of sde in uh 2.57 multiples

of ibra okay that's pretty good all

right so let's be back so that's how we

got to these numbers right here

so 2.41 2.57 and you know what I want if

I'm representing the buyer I want to be

aggressive to see if we can even get a

bigger deal this is already a pretty

good deal as it is but what if we offer

2.35 percent that means that our offer

would be a 752. let me let me tell you

what happens when let me show you what

happens when we actually change our

offer multiple based on the multiple of

sde say we want it to go three times we

really wanted it because it's a really

good business and we know there's going

to be competition we wanted to offer

three times cash flow you notice what

happens to our price our offer would go

to 960 000. why would you want to pay

more than what the asking price is

that's between the buyer and the seller

and beauty is in the eyes of the

beholder

it really is the buyer who sets the

price we look at the comparable sales to

give us a a a yardstick a measuring line

but as I had said you know I would want

to always offer a little less see

because it all comes down to cash flow

so back to the 752 000 these numbers

carry over from the other side our cash

flow stays the same this is the original

deal we will get it at 2.35 now here's

where things get a little more

interesting now say you don't have 246

000 worth of down payment and you want

to have a loan you want to have an SBA

loan that will amortize over 10 years

well in that case your cash out of

pocket would go to ten percent so

instead of putting 246 000 down you

would put 75 000. now see what and this

matters when you look at your cash on

cash return which is you know this is a

traditional a real estate investing

um

kpi key performance indicator so in the

original scenario your cash on cash

return is 77 not bad that's 246 on the

820 000. but look at what happens as you

put less money down you have higher

leverage and your cash on cash return on

the same is 225 000 per year of cash

flow on 75 000 down payment that's

incredible that's phenomenal your cap

rate is 42 percent now for those of you

who are coming from the real estate

world and fixing flipping and and buying

a single-family residences and or or

even multi-unit uh multi-family where

you know you'll be lucky to get you know

six percent cap rate you're looking at

42. owning a business bids owning real

estate for cash flow 10 times out of one

so all right let's keep going and try to

be as if you can talk as fast as I can

so you can keep up all right so

here's what happens you have a uh your

down payment of 70 uh two thousand and

by default this blue line says really

where I

what I want anybody everything else is

built in formulas

um if it's everything all you have to do

is punch in the the light blue cells and

everything else is spit out now

um

those buyers who work with me one-on-one

those in my they get to use this now for

you guys I would have a modified version

now if you want to work with me and get

to see the real deal absolutely reach

out to me because this is something that

I've been working on for a long time so

I'm very careful as to who I share it

with but does it work absolutely so you

have here a

90 SBA loan and now here's some of the

oh by the way there are other things

that are having shown you in this this

is just the deal analysis portion there

is a use of proceed which you know goes

um

there is a lot more formulas here there

is a pretty concern when you do analysis

on the actual deal the illegible passive

income for those owners who own real

estate and they're paying rent to

themselves there is a global

um

there's a a global Debt Service

calculation which you know it's it's

it's there's a personal cash flow

analysis there's all kinds of things

here so

I don't want to confuse there and

there's other indicators and things that

I really we really don't have time to go

over and this supposed to be quick video

uh but look let's keep going so at 75

000 down payment on ten percent on on

our offer of 752 000 you have a loan for

676 a 100 or 90 LTV our annual Debt

Service

um

actually you know what this is gonna be

right here this is gonna be zero

and this is going to be 90 see so what

happens is this is a bank loan and what

it does it pulls that information from

the other use of proceed sheet and it

brings it to the four now SBA Loans

right now about ten and a half percent

Prime is seven and a half I think and

then

um and usually the prime plus the uh

Delta which is what the lenders live on

uh could be anywhere from Two and a half

to three points so ten and a half is is

basically a very safe calculation

because if you can make money on that

I'm sure that even if the rate is if the

rate is better than that then you're

you're doing much better than cash flow

but do not get stuck on the rate the

rate is really irrelevant what you're

looking at is the cash flow on each and

every deal

um you

buy a business when it's the right time

to buy a business regardless of the rate

just like you would buy your dream home

whenever you're ready to buy it

regardless of the rate you buy when

you're ready to buy and you look at a

deal by deal basis to see what numbers

so that's what exactly what we're trying

to do right now we're looking at the

cash flow look

annual cash flow after Debt Service so

we begin with the 320 and we have a

hundred and nine thousand dollars worth

of annualized interest in principal

payments our debt service coverage ratio

is more than ample this is a really

really good deal for the bank this is a

really really good deal for you look at

our annualized cash flow 210 411 cash on

cash return is 280 percent cap rate is

42 percent the difference between the

two scenarios is 20 000 more

yeah about twenty more thousand dollars

even at a ten percent interest rate with

zero carry

so and and things can get a little more

interesting if you want the seller to

carry and there's going to be a

moratorium on the seller from the SBA

that the seller is not going to get paid

or no for two years to help you with the

cash all those things get more

complicated I want to keep it simple so

can you imagine buying a business where

the analyze cash flow is nearly 21 well

in this case what is 210 000 a year

divided by 12 your cash flow is 17 500

per month after you service the debt

after you run your business on a

four-year business I say this is a great

deal and this is a great opportunity

this is I would say buy this deal or

deals like this uh and that is really

what I'm all about helping buyers buy

their dream first business and get out

of the rap race and become the CEO of

your own company guys if you really like

this video please comment your comments

are very very helpful and I'll keep

making videos like this all right

bye everybody limited time I'm giving

away my deal analyzer my cash flow

calculator this is a tool that has been

downloaded probably hundreds of times in

the last few months by viewers just like

you what it allows you to do is exactly

what we did in today's video with all

the bells and whistles it is my gift to

you for being my subscriber the link

will be down below thank you so much for

watching my videos