The Value in Low SDE Businesses

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The value in Low SDE businesses.
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[@MojaveModelRailroad]

Great video. Been watching your videos for over a year now. Sometimes you have to think outside the box. I am just finalizing taking over a small retail business. Just as you said this was run by an elderly gentleman who ran it as a hobby and opened part-time. I worked out a deal a year ago where I would work part-time for "free" but those hours in the end would be my down payment. During that year I built him a new website as he didn't have one, inventoried the store, started to implement my business practices and have already seen a 25% bump in profit. Great news is the price was set on the old value of the business from a year ago before I started to work. So my down payment was covered from the past year of work, owner is doing 100% financing on the balance and has been telling everyone over the past few months I am going to be the new owner. One of the things you didn't mention is with these smaller business if you structure them right you can also keep the owners tax free from the 15% to 20% capital gains tax in the US. This was a win for me as well as for the owner as he had no other offers over the past two years to buy. You have to know the business for sure as then you will see the hidden goldmine you might have the chance to pick up. Sometimes the toughest thing is convincing an older generation they can either take a smaller deal or close the business and lose what little value they might have got. Thank you for all the great videos as without them I doubt I could have worked this deal the way we structured it.

[@amithreddy6741]

Thanks for sharing your deal structure! I might use it in a future deal. 😀

[@MojaveModelRailroad]

@@amithreddy6741 Yes it worked out great. Got to learn what he has done over the 18 years, the regulars have gotten used to dealing with me as well as all the vendors. So basically just signing all the paperwork is a formality as I've already been running the business the past few months.

[@Tanyatnt]

@Majove - great deal making ability! my congrats! I will keep my eyes open for mishandled businesses around my area. Although, not as common since rents are way high where I live, there is no room for error, you'd be likely to get shot down. But I love your out of the box thinking. I did not understand what you meant by "with these smaller business if you structure them right you can also keep the owners tax free from the 15% to 20% capital gains tax in the US." care to elaborate a bit on that? Thanks!

[@MojaveModelRailroad]

@@Tanyatnt Capital gains is paid 0% up to $44,625, 15% $44,626 to $276,900 and 20% over 276,900. So in the this owners case he is 79 and doesn't have much yearly income. So we structured the deal over a 10 year amortization thus keeping his overall income under the $44,626 threshold. So no capital gains. As I worked the past year for free building the business and creating more income now for him, my down payment for the business applied from what he would have had to pay me for the year. Balance for the business will be paid monthly with a balloon payment at 7 years and 10 years. Now those balloon payment years will put him over however, he is going to stay on and work part-time as a consultant until payment is cleared. His yearly bonus for his work will cover and offset what little capital gains he will pay. This is a very unique case as I had been to the store for years so we already had a friendship. The collateral for the note he is holding is the inventory of the store. We also have an arrangement in the agreement that if the store exceeds my projected goals in five years I can buy him out then, but would also cover any capital gains tax he might incur. This might be a one in a million deal, but I took a lot of advice from this channel. I set down and really wanted to find out what he wanted to do with the money and explain to the him the current real value of the business and my plan to increase business. Over the past year he has seen first hand what I can do and was more than comfortable knowing the business was going to be in great hands. Truly a lot more involved but you get the idea.

[@DavidCBarnett]

I love your story. Inspirational for many. Thanks for sharing.

[@enoessien7641]

Listened to over 100 over your videos….but this one hit home 👍🏿💯

[@DavidCBarnett]

Appreciate that.

[@thegoodlife167]

awesome, I love the level headed approach instead of hypemachine content out there, thanks David !

[@DavidCBarnett]

Thanks Goodlife!

[@Jesse_Ti]

Great video!!

[@DavidCBarnett]

Glad you enjoyed it Jesse!

[@enoessien7641]

Great post …. Evaluating this paradigm shift right now ….around several business concepts I’m considering acquiring. Thx Dave for the perspective!

[@DavidCBarnett]

Glad it was helpful!

[@amithreddy6741]

Great video David! I didn't look too closely at those lower SDE deals because I worried I would have no room to absorb the cost of increasing inputs or mismanagement on my part. I guess the high seller finacing allows the buyer to walk away if things go south.

[@DavidCBarnett]

The high seller financing means there is a greater chance the seller will be helpful to you if things go south. They're the expert on that particular business.

Nice thread and topic.

[@DavidCBarnett]

Thanks

[@RomilCPatel]

There’s actually a name for this I’ve heard “job replacement searcher” sort of like a searcher when it comes to search funds but instead for buying one of these small businesses. If you the individual earning a high amount from your current job it’s best to find a business in the same industry as that business owner will likely have a very high owners equivalent salary too, which would eliminate or at least reduce the problem you showed in the video. Also find ways your current skill set can supplement that of the business to quickly grow it.

[@edman209]

just wanted to say hi from arrons stream

[@DavidCBarnett]

Welcome. Things are a little less angry over here LOL.

[@edman209]

@@DavidCBarnett he is a cool guy to meet, I somtimes wish I could talk to people more at times but its the way things go. I hope you are well

[@Tanyatnt]

@David - great video, I have been wearing the golden handcuffs for years now and not sure how to get them off. I am currently looking to buy a laundromat hoping this gives me a little wiggle room. We shall see.....Thanks!

[@DavidCBarnett]

Picking up things you can manage on the side is definitely a popular strategy Tanya.

[@Mario55555]

Great video filled with valuable information. However, I didnt necessarily see/hear the fianacial/income upside? Is the main idea, to buy a "discounted" business and update it to 2023 operating and marketing standards with the goal icreasing sales? Maybe I missed the long term upside? But I feel like my take away here was "leave your high paying job, and buy an old Main st. business, then downgrade your lifestyle to live on a low SDE? Doesnt seem like something anyone would want to do with out and upside So, what are the positives? Imagine your wife was asking you, why, why do this? What would you answer. Genuine question! Thank you

[@DavidCBarnett]

The upside is that you now have a business that you can grow. See this video also: kzbin.info/www/bejne/e5-7fXd6Z6eEnZI

[@Mario55555]

@@DavidCBarnett Yes, but if I leave my 75k salary for a, for example, convenience store manager's salary of 50k while I own and operate the business, then when/how will I see an income increase? Is the theory that once I'm able to increase sales I'll be able to pay myself a greater salary? Is the goal to grow the business' value so that I can borrow against it? Or grow it enough to work less hours and still make my lifestyle income? The goal is to improve one's lifestyle, free time, and family experiences by owning an asset such as a business, right? So how do the benefits of business ownership manifest themselves in a real tangible way, once sales are increased? If I'm trading a 40hr a week 75k job for a 60hr a week 50k job, then there's gotta be a timeline where the scales balance to show the benefits of having taken the pay cut for a pre determined amount of time, right? Please let me know if my thoughts and concerns don't make sense. But ultimately, I'm trying to determine if the benefits outweigh the sacrifice and what those benefits actually look like.

[@plannerjoy]

@@Mario55555 I think that you’ve answered your own question. The goal is to reduce your hours by establishing efficiencies in the business that are lacking and increase the revenue so you can pay yourself more over time. Being a business owner is riskier than being an employee and a lot more responsibility lays on your shoulders. And unlike a job that you can easily quit if you don’t like for some reason you can’t quit a business as easily. People own and operate small businesses for various reasons, flexibility in schedule or not having a boss to tell them what to do. I would say that maybe 20% of small business are intentional and were started with a business plan, strategy, etc. Most small business are started around someone technical skill and are operated by the seat of their pants.

[@elefanny1106]

I like you

[@DavidCBarnett]

Thanks. I love you and all my other viewers.

[@Bam305_]

Do you happen to have videos on how to purchase SDE business?

[@DavidCBarnett]

I'm not sure what you're asking. SDE is a notional measure of cash flow and every business would have an SDE.