Buying an Established Business: Making the Numbers Work
There is a version of this pitch that goes: put down $100,000, borrow the rest, buy a $1 million company with a 20 percent margin, and double your money in the first year.
Run it properly and it looks different.
A 20 percent profit margin is 20 percent of revenue, not of the price you paid. A company that sells for $1 million is not automatically a company doing $1 million in revenue, so the margin tells you nothing about the purchase until you know what it is a margin on. And the $900,000 you borrowed has a payment attached to it. That payment comes out first, every month, before anything reaches you.
Say the business does $1 million in revenue at a 20 percent margin, so $200,000 a year. On $900,000 of acquisition debt over ten years, principal and interest will typically run somewhere between $10,000 and $12,000 a month, which is $120,000 to $144,000 a year. Before you take a dollar, most of the profit is already committed. What is left has to cover your own time in the business, the working capital the company needs to keep trading, and whatever the previous owner was doing that you now have to pay somebody to do.
That is not an argument against buying. It is the argument for knowing the number before you sign, and it is where most first-time buyers get hurt. The terms of the debt matter as much as the price, which is why what the loan actually requires is worth understanding before you negotiate the purchase, not after.
Why an Established Business Is Still the Better Starting Point
The case for buying rather than starting holds up. An established business already has customers, a track record you can read, and revenue that existed before you arrived. You are buying evidence rather than a forecast. The question is not whether the business works. It is what it is worth and what it will cost you to own it.
Understanding Valuation Methods
How the Price Gets Set
Four methods do most of the work in a smaller deal, and a seller will usually lead with whichever one flatters the business.
- Discounted cash flow. The present value of the cash the business is
expected to throw off, discounted for the fact that money later is worth less than money now. It is only as good as the forecast underneath it, and the forecast is the seller's.
- EBITDA multiple. Earnings before interest, taxes, depreciation and
amortization, multiplied by a figure drawn from comparable sales. It suits a business with steady cash flow. Ask what is being added back into EBITDA and why.
- Revenue multiple. A multiple of current or projected revenue, used where
growth matters more than current earnings. It says nothing about whether the revenue is profitable.
- Precedent transactions. What similar businesses recently sold for. It
reflects the market you are actually buying in, which is why it tends to be the most grounded of the four.
None of these is the answer on its own. They are four readings of the same business, and the gap between them is the negotiation. The three-year picture in the balance sheet is what tells you which reading to believe, and the return you are underwriting is calculated after the debt service, not before it.
The Role of FM Enterprises
Where FM Enterprises Fits
Two things, stated plainly, because this page used to be vague about it.
The first is structuring the deal and presenting it properly. That sits inside fractional C-suite advisory: working through what the business is worth, how the purchase is put together, what the seller is really selling, and what the numbers have to cover afterward. Fadi's claim here is pattern recognition across a lot of deals, not execution on your behalf.
The second is lending. FM Enterprises lends from Fadi's own balance sheet, on deals it has underwritten itself. That is the whole of the capital arm. It does not raise money from other people for a fee, and it does not take a percentage of what you raise elsewhere.
Conclusion
The Takeaway
An acquisition is a good deal or a bad one on the arithmetic, and the arithmetic is duller than the pitch. Work out what the business earns, what the debt takes out of it, and what is left to pay you and to keep the company running. If the answer still works, you have something. If it only works when the debt service is left out, you have a brochure.