Codie Sanchez breaks down why acquisitions fail: buyers ignore the math. Four numbers matter: debt service needs 2x coverage, operator salary must be market rate, growth capital should be 10-15% of revenue, and owners have to pay themselves too.
Chapters
There's one number that will kill you in business, whether you buy it or build it. And if you don't know this number, you will go broke in 12 months. The number is cash flow. But there's four underlying numbers that no entrepreneurs know. But we're going to make you smarter than the average number. One is debt service. So if you're using an SBA loan or seller financing to buy a business, that means that you have interest. A healthy business should cover its debt service. If you can't cover the debt service by 2x, then you should really watch out for this business going sideways. 2. Operator salary. If you want to be an owner of a business, you can't also run the business with nobody else on underneath you. You need somebody who's an expert and they need to be paid a market rate. 3. Growth capital. This is the silent business pillar. A real business needs 10 to 15% of revenue set aside for growth. If you don't have that, you're likely to die. 4. Your income. If a business doesn't pay you, it's not buying you freedom, it's buying you stress. So make sure that you pay yourself as an owner, at least the market rate for being an owner in a business. Because remember, the point of the game of business is making money while you're doing it.
