#17 | Buying a Business, then Hiring an Operator

In the SMB acquisition space you will often hear about people trying to buy a business and then hiring an operator to run it day to day. 

Obviously, this sounds pretty compelling right? 

Buy a business and then benefit from that ownership without actually working in it day to day.

I haven’t really thought too deeply about this because it seems out of reach right now, but I heard a podcast this week that really helped me have a better understanding of what size and scale of business you would need to acquire in order to pull this off.

I think the business needs to generate $300,000 in free cash flow after paying debt service. 

Why $300,000? 

Because that is when the business can afford to hire a highly capable CEO to take over operating the business and probably still have a bit of profit left over. 

This is what Andrew Wilkinson, Co-Founder of Tiny shared on a recent My First Million Podcast episode. 

Tiny is a holding company with dozens of independent businesses each with their own CEO.  In the episode, Andrew shared about how to hire a CEO to operate your company based on his experience in hiring roughly 40 different CEOs for his various portfolio companies.

There was a ton of great value in the podcast, but I think the most important thing for most of us small business owners and buyers to hear was that until your business generates $300,000 in profit, there just isn’t likely enough wiggle room to hire a great CEO which means as the business owner you are stuck in that job indefinitely.

So how does this relate to looking for potential small business acquisition targets? 

I think it means that you need to be looking for businesses with at least $500,000 in earnings or cash flow prior to your acquisition. 

Why $500,000? 

Let’s look at the math.  Let’s assume you pay a 3x multiple of earnings to buy the business.  That is a $1,500,000 purchase price. 

If you use debt to finance 90% of the acquisition and you assume a 10 year loan term at current interest rates of 11%, your annual debt service would be roughly $220,000. 

So after debt service, you would have roughly $300,000 left to go toward hiring a skilled operator for the business. 

I think a $1.5 million purchase price is out of my price range, so I think that means I would be acquiring a business that I need to operate day to day initially and just aim to grow to that profitability level that would allow me to hire an operator. 

Any examples out there from business owners who have been able to replace themselves in the day to day before reaching that level of profitability?