Mergers and Acquisitions 101

If you’ve ever been confused by terms like “mergers,” “acquisitions,” or “SDE multiples”…

Today’s newsletter is for you.

After completing seven acquisitions and helping hundreds of students buy their first businesses, here’s everything you need to know about M&A 101.

The basics

Merger: Two companies combine into one (think Exxon + Mobil = Exxon Mobil)

Acquisition: One company buys another (Facebook buying Instagram)

What we focus on: Small business acquisitions between $500K-$5M where individuals buy businesses like HVAC companies, plumbing shops, or accounting firms.

These deals happen daily, but nobody talks about them.

So, where do you start?

First, define your buy box.

You’re looking for businesses priced between $500K and $5M with profit margins of 15-35% (what I call the “golden ratio”).

Ideally, they already have a general manager running day-to-day operations.

Before you start looking at deals, get pre-qualified with an SBA lender.

Use that letter as “proof of funds” when contacting brokers. It immediately shows you’re serious and puts you at the top of their list.

The key questions to ask

When you’re evaluating a business, ask three critical questions:

1. Why are they selling? (Retirement, health issues, and divorce are the best reasons.)

2. Is management staying? (This is often a deal-breaker if not.)

3. And what's their timeline?

These answers will tell you everything you need to know about whether it’s worth pursuing.

Valuation and deal structure

Small businesses typically sell for 2X to 4X of SDE (Seller’s Discretionary Earnings).

That's the cash flow plus all the owner’s personal benefits like car payments and vacations.

A 2X multiple means the owner does all the work. A 4X multiple means it runs without them.

For deal structure, I use what I call the “trifecta approach”: SBA loan for up to 90%, seller note for the remaining 10%, and buyer injection if needed.

If the seller note is on “full standby” for 10 years, it can count as 5% of your injection.

That means 5% out of pocket for you or your investor.

Due diligence and closing

Due diligence is where you verify everything: three years of financials, customer concentration, legal issues, and equipment condition.

Red flags to avoid include:

• Messy books

• High customer concentration

• Pending lawsuits

• And unclear contracts

After closing, focus on transition: introduce yourself to employees, communicate with customers, meet vendors, and have the seller make key introductions when possible.

Get this right, and you’ll set yourself up for a smooth first year as the new owner.

Your opportunity

The barrier to entry is at an all-time low.

I’m helping hundreds of former W2 employees become business owners with little to zero down.

These opportunities are everywhere.

So, to help readers like you out…

I occasionally share high-quality businesses for sale with subscribers who might be interested.

To opt in to those emails, just fill out this 2-minute survey:

👉 I want to buy (or invest as a silent partner into) a small business

Or, if you have a business you want to sell, share the details below and we’ll reach out if we find a good fit:

👉 I want to sell my small business (and I’m actively looking for buyers)

Onward,

— Ben Kelly