Buy out your competition with their money.
In December I attended a trade show in another industry. The atmosphere was very positive overall. One speaker mentioned one account who had been with him for 10 years—at the rate of $22 million a year. Another one had bought out 60 competitors. While that person was interesting, I was far more interested in the person I met at a round table discussion. I will call him…Buck. Buck had bought out 7 competitors in the past five years or so. Five of them work for him now. Best of all, he had done it without spending a dime. I want to share how Buck structured his purchases.
It’s simple. Offer a percentage of the sales their store generates for a period of time. If your offer is 15% for 3 years, and their store does $200,000 a year, they get $30,000 a year. At the end of 3 years, they’ll have $90,000.
Your benefit is obvious: you’re not out any cash. You don’t have to worry about your credit rating, applying for a loan, or how you’ll handle the repayments.
You can buy a business of any size this way. If you’re doing $115,000 per year with your Magic-and-Pathfinder shop, you can buy out a full-service retailer down the road who’s doing $400,000 a year. If it’s cash-positive, you can take on anything.
This cash-forward situation allows you to grow at an unlimited pace. As long as you can close the deals, you can buy the stores.
If the business you buy out decreases in productivity, your cost decreases likewise. This reduces your risk if the business slows or tanks. If you had a conventional bank note to pay back and sales dropped by 50%, you’d be in trouble. In this scenario, you reduce your expenses at the same time as you reduce your income.
You still have the benefits of growth by more traditional means: you enjoy the efficiency and purchasing power of increased volume. Because each store naturally has a different sales mix, you can diversify your sales to reduce the risk of manufacturer failure. Most importantly, you should be able to afford a greater personal salary.
The seller has a passive income that he can rely on. Because your offer doesn’t pinch your cash flow, you’re very likely to be able to make the payments.
The seller can choose to take the income and rest from working. He can go to school for a year or two while you pay his bills. Or, he can continue to work elsewhere and push himself up into a higher tax rate.
The seller can see a greater total sale price with this offer than with a conventional buyout. Also, he stands to benefit if sales increase. If you’re growing through acquisitions, it’s likely that you’re doing something right. You should see sales increases. If you extend an offer of employment, the seller can work to increase sales, thereby directly increasing his personal earnings. I’ve seen somebody ask for $95,000 for the sale of his business and end up earning over $120,000.
Between adjusting the rate and the term of the buyout you can make an offer that works for both of you. Variations include
- offering an additional percentage if the seller works for you managing his former store
- offering a nominal percentage of ownership in your company as an incentive along with the sale
- offering an advance—an up-front payment taken from the expected percentage payment
If the seller insists on getting money up front as a condition of the sale, offer a advance against future payments. If the payments are structured at 10% of gross sales, and gross sales for the first months are expected to be $12,000 each, then you have about $3,600 to play with. Offer $3,000 down, to be deducted at $1,000 a month from the first 3 months. You pay the seller $200/month for those three months, then resume paying him about about $1,200/month—the exact figure dependent on those sales, of course.
You can remove some of the seller’s perceived need for up-front payments by negotiating to take on his debts. If he owes $5,000 to distributors, offer to buy that debt. Pay what you can to the distributors and catch them up as you can. You might be able to pay them an extra amount per statement or per month.
Let’s say that you have a store with decent sales and want to buy a smallish store, expand it into the suite next door and add in-store gaming. Small Game Store is doing $100,000 in annual sales. You’re doing $350,000 at your current store.
Everything goes well and the seller agrees to 12% of his gross sales for 3 years, transfers all of his debt to you, and agrees to manage the store for you (thus being directly responsible for his own future income from the sale). You spend cash on the build out, merchandise, and marketing. Don’t spend it on your purchase.
Bob, your new store manager, gets a salary while working for you, and he also earns 12% of what improves to $200,000 in short order with your improvements. After accounting for the growth period, Bob might earn $62,000 for a store you might have paid $10,000 for if you’d paid cash. You also gain a motivated manager to run your store for you. He earns money when you succeed. Your company’s sales volume increases more than it would if you had looted the store and left the empty shell behind.