How to buy and turn around a
distressed business or 'roll-up' competitors

On this site you’ll read real life stories of how 23 entrepreneurs find, fix and then sell small companies on the edge of failure. Sometimes we buy our weak competitors in a roll-up and get new clients cheaper by acquisition then organic growth. If you like these concepts, come to the next workshop. Learn how we...

✓  Find distressed companies that are worth saving for capital gains
✓  "Roll-up" your competitors for rapid growth with little cash or risk  
✓  Why buying a distressed business is the BEST way to do a start up

From KC Truby Lonesome Cowboy Publishing Inc. 301 Thelma Drive #426, Casper WY 82609 (760) 207-6385

How do you figure out what an acquisition is worth?

By on May 18, 2014

How do you figure out what an acquisition is worth?

By: KC Truby

The first question to keep in mind is different. The question you always ask is “What is this acquisition worth to ME?” Don’t pay what the seller wants, pay only for what you will get out of the deal.

That does not mean you should try to steal the business. It is too emotionally stressful to try to get every deal for nothing and even worse. You will make the old owner, the employees and the customers and vendors mad. They will get even with you.

Now with all that said here is how I determine worth.  

On average in America today most small companies sell for around 2.5 times trailing EBITDA. That is called the multiple. If the company is well run, with a top notch staff in place and has assets that you want, you may end up paying 3 to 4 times earnings.

Very seldom is a company with gross sales under 5 million worth more than a 4 times multiple. Before you pay that much, get a PAID local valuation done by a CPA firm or business valuation service. Email me at kctruby@msn.com for a local recommendation.

How much can you afford in payments

Another rule of thumb is that you should not get yourself into a situation where your payments for the business exceed 33% of last year’s profits. That allows you to put 33% into a performance paid manager and still have enough to pay your taxes.

What that means is if I buy a company for $1,000,000 that made $250,000 in profit last year and my payments are $14,500 a month (best deal I could get) I have to pass. The most I should pay is $7,000 a month or I’m on thin ice.

Now the exception (there always seems to be exceptions) is the company with hard assets like R.E. and machinery that could be liquidated for close to my $1,000,000 loan. Then it might be worth the risk. Another exception is if you see how you could easily take that company and double the net profits to $500,000 a year in 90 days. Pull the trigger and do the deal.

When do I pay ‘walk away’ money?

Sometimes we buy companies for their ‘off balance sheet’ assets. We plan on closing the business and calling all the customers over the weekend to move them over to my current operation. We plan on hiring the employees in our existing company and we might use a few of the connections, contacts and distributorships the target owns. But I am not buying a going concern. The seller is closing down on Monday.

In these situations which happen a lot when we roll up distressed competitors we usually pay some small cash price. Generally in the range of $1,000 to $10,000 and we pay in cash in a brown envelope. I book the payment as current expense and we don’t know what the seller does with the cash.

Summary: At this point every author will put in the mandatory disclosure to get local professional help. That is NOT a joke. These are guidelines and unless you have done dozens of these deals, run your valuation past an accountant and your lawyer.   If anyone objects – pull out.


About KC Truby

From their ranch in Wyoming, KC and his wife Linnea have bought or started 21 companies as a side line to their accounting business leading them into M&A as a full time business in 2012. These companies are located all over the Western Rocky Mountains, London and India. Since 1969 through their accounting and training companies, KC has taught 18,000 business owners how to improve cash flow and find more customers by installing standardized systems in their small business. Since 1989 KC has presented over 1,000 seminars and training classes to the small business owner.

2 Comments

  1. Gerome

    June 29, 2014 at 3:30 am

    If the multiple increases as the total revenue of the company increases past 5 million, couldn’t you just buy a bunch of little guys at a low multiple and turn them into 1 company and then sell out at the higher multiple?

    • KC Truby

      June 28, 2014 at 4:14 pm

      That is right. It is called a roll up, it happens ever day. Buying a 10 small companies at $500,000 in revenue and then selling the 5 million dollar business for a higher multiple is common

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