Welcome!
I’ve looked at thousands of businesses for sale, and learned to read between the lines. For every issue, we'll take a deeper look at a listing, learn something, and I'll rate the deal at the end!
This week’s listing: A “business incubator & accelerator” — they help other businesses grow and take a cut of the revenue generated.
The numbers: $5.8mm in revenue with $4.3 EBITDA = 74% profit margins! Wild!
Green flags
This is a pretty unique business. They deploy their team to work for clients, probably doing stuff like online marketing, strategy, data analysis, that kind of thing.
One great thing: when you’re taking a cut of profit, your upside is unlimited. The more you grow a customer’s business, the more you win. I like it when incentives are aligned like that. And if it doesn’t go well, the downside can’t get any lower than zero.
Another benefit: you don't have to invest capital. It’s basically a sweat equity model, where your investment is time and expertise. So it’s a pretty low-risk scenario.
And the potential upside is nuts. These folks list a client who grew from $2M to $68M/year… if they’re taking 5 or 10% of that growth, they’re doing great.
That’s probably why they’re walking away with a 75% profit margin. In old-school businesses, you’re maybe squeaking by with 5% profits. 15% if you’re lucky.
But wait, there's more… The current owner works less than 10 hours a week. Crunch that profit margin by 500 hours a year, and you’re making $8,600 an hour, with 75% free time.
Red flags
Obviously the money is great. But that can attract some bad people to businesses like this — the people who say they want to invest in your business, but they’re actually proposing some kind of royalty scheme and being shady about it.
So it’s possible you look under the cover at the CIM (Confidential Information Memorandum) and discover it’s a bunch of porn sites, sketchy supplements or something else you wouldn’t want to talk about at a cocktail party. So that definitely worries me.
The other red flag is the seller story. You want to see something that makes sense: retiring, or relocating, or changes in situation of some sort. But why is someone selling up when they’re making this much on 10 hours a week?
They also don’t list an asking price. That makes me wonder if they want a ridiculous amount for it.
Finally, there’s a too good to be true aspect to this. Something just smells… funny. I can’t put my finger on it but my Spidey Sense is tingling. I’ve learned to listen to it!
What I’d ask
First there’s the two things I just mentioned: why is the owner selling, and how much money do they want?
Then there are a couple of things they mention that I’d want to dig into:
“Patented technology” — I’d bet that’s some sort of software around online ads, but that’s something to dig into. What have they built, and how defensible is it?
“Extremely high-value retainer contracts” — what are the terms of those contracts? Will I be able to keep them on? Is there room to grow?
Last, they call themselves a “market dominator”. What does that mean?
My rating
As long as you keep your wits about you, do things above board, and don't pull the wool over anybody’s eyes, “business acceleration” is a great game to be in.
It’s low-capital, high-reward, and if this person’s only working 10 hours a week then it sounds like there’s room to grow.
This seems freaking cool. I’m probably going to check out the CIM to see if my guesses are right.
This is one of the freaking coolest businesses I've ever seen. As long as everything’s on the up and up, and the price isn’t insane, it’s a wary 🌶️🌶️🌶️🌶️🌶️ out of 5. Awesome business but I’d be doing double and triple depth due diligence on this one.
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Want to go deeper on this deal? My podcast Acquisitions Anonymous did an episode on it — give it a listen!
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What do you think of this deal? Hit reply and let me know!
Michael
P.S. This deal is from Axial, so you’ll have to sign up if you want more details!
