How I bought (and sold) a 6-figure business with my friends

The Origin

“Did you know you can buy small businesses?”

It was September 2020 my friend had just changed the course of the professional part of my life. I knew that it was possible on a large scale. I’d heard of companies like Google buying companies and turning them into product offerings. But that was 10s if not 100s of millions. I had never heard of buying small businesses.

Spoiler alert, we made it happen. My friends and I not only purchased but also sold a business. We pooled our money together for a downpayment in October 2021 and bought a business worth more than half a million dollars. In April, 1.5 years later, we sold the business for a profit. Add in the cash we built up while operating the business and we made over a 400% return even after all the fees and paying off the loan. We acquired another business in November of 2021 and were currently closing on a third. Now I’m searching for a fourth.

But that’s skipping a lot, here’s how the first one went down.

Early days

Around the same time my friend told me about the concept of buying businesses, he had also told two of our friends as well. We all loved the idea and hopped on a call to discuss the path forward. The team was assembled.

My friend would send us prospectuses and we’d review them. On deals we liked, we’d dig a little bit deeper. Then a couple of seller calls. Then a couple of LOIs (letters of intent).

Back then we had no idea what we were doing. We didn’t know what a good deal looked like. We didn’t know about the financing options we had available to us. We would send goofy offer sheets to sellers that included ridiculous mixes of seller notes (pay the seller back over time) and crowd-sourced capital. And at the time the crowd that saw the vision was small.

Needless to say, the offers we were sending across at that time weren’t being received well. Some brokers even told us we needed to get serious or they weren’t going to keep connecting us with sellers.

For me, this time period lined up with a rough period I was going through in my corporate job at the time. And the whole world was dealing with that first COVID winter. Things started to slow down. The search took a pause.

But the learning didn’t. The number of podcasts that I’ve watched on buying small businesses is ridiculous. And it’s only a fraction of what my friend has watched (he was sending a lot of them my way). We were also introduced to a book called “Buy Then Build”. I can’t exaggerate, this book is the bible of this space. It’s not everything you need to know, but it’s definitely what you need to know to get started.

A few months later, in March of 2021, one of my friends sent the rest of us a prospectus. It was a press release distribution company. Basically, clients could upload a press release to the site and they would handle distribution to sites like Yahoo Finance, Google News, Market Watch, and a bunch more websites. The business was relatively simple. Basically just 2 products—a high-end distribution and a lower-end one. The owner worked about 35 hours a week and had a developer and virtual assistant that could both keep working with us after the sale.

We liked it. But the owner had already signed an LOI. Back to the search.

A couple of months went by and we caught a lucky break. The other buyer wasn’t able to close. The business was back on the market.

And at this point, we had learned about the possibility of SBA financing. Essentially, the US government doesn’t want to see small businesses fail. They don’t want businesses to close their doors when owners retire, pivot, or do whatever else they want to do. The SBA program is a way for the next generation of owners to get funding and buy those businesses so that doesn’t happen. At terms that make it worth it for all the parties involved.

Closing

Armed with our new knowledge about SBA loans, we reached out to a loan broker to get pre-approved for a loan. For 2 weeks we filled out what felt like endless paperwork. We were pretty inefficient at this point. This was our first rodeo. Despite all that, we got our pre-approval in May of 2021. We sent that off to the broker on the deal and we were off.

And when I say we were off, I mean we were at starting line. From there we had an initial call with the seller, submitted an LOI, and began diligence. This meant asking any and every question we could think of to the seller. This was a huge purchase for us so we had to make sure we knew everything about the business.

In parallel with that, we had to get the loan underwritten by the bank. This meant even more paperwork. Management resumes. A business plan. Presentations to the bank to help get them comfortable with the deal and with us as borrowers.

And we were green. Newbies. So the bank took their time getting comfortable. In late July we finally had a formal loan proposal (not approval). What else could the bank need to know? We felt like we had answered every question. And we didn’t have context for how fast or short the process should be. We knew that 2.5-3 months was about the fastest it could be. But again, we were newbies. We knew it would be a little longer than that. This still felt like it was dragging though.

More questions from the bank. More calls. In this space, a ton of deals fall apart at this stage. Buyers and sellers get tired of all the waiting. The pushback from the bank. The back and forth. It’s usually referred to as deal fatigue. But we pushed through. And at the end of August, we finally got the formal approval.

We were ecstatic. But as we’ve learned a few times now, this was really another starting line. A ton more paperwork. Hiring a lawyer for the legal documents associated with the sale. Reviewing and editing those documents (redlines) ourselves. Replacing incompetent lawyers that had us redlining ourselves (thank god we have a great one now). We were learning a ton. And keeping up with everything as it came up.

This whole time period was incredibly exciting and frustrating at the same time. We were really making it happen. We were close to buying and owning a business. But a combination of our inexperience and the bank’s organization (in terms of updating the closing checklist) was dragging it out.

Then finally, on October 27th, it was official. We were business owners! We are business owners.

We were hyped. Another starting line! This one felt a little sweeter than the other ones though.

Transitioning

On the first day of owning the business, the previous owner started transferring all the accounts over to me. All the behind the scenes stuff. He made intros to the virtual assistant and developer he had been working with. Then intros to all the vendors that he was working with. Things were moving fast. After months of slow-moving paperwork, this was a blast of fresh air.

Because I wasn’t working at the time, it made the most sense for me to take on the previous owner's responsibilities. The seller had created videos of every process he did so the transition was smooth. Or about as smooth as a first-time business owner/operator transition can be. There were some growing pains.

We quickly ramped up the responsibilities of the virtual assistant that was working with the business and gave her a bump in pay. This showed us how hard change can be within organizations. She had been working with the previous owner for years and had little responsibility in terms of being the final set of eyes on anything. She wasn’t making decisions about clients’ issues herself. And we wanted her to. It was clear that this would be a process.

My friend had been working with another VA at the time and we also quickly hired her to assist the current VA with the day-to-day tasks required within the business. With one VA in Serbia and one in Jamaica, we had coverage over most of the day.

Learning and Operating

The business still wasn’t exactly on autopilot. Far from it. Throughout basically every day, both VAs would ask tons of questions in the Slack channel that we all shared. They tried to get a decision on basically every question that clients asked. This taught us that documenting how to do tasks wasn’t enough. We took note of every question they asked and answer they gave. Created easy-to-follow guidelines for when to give discounts. Drafted email responses for common issues. And the whole time, we coached our employees that it was okay to make decisions themselves based on the guidelines we gave them.

We started referring to the business as our personal MBA. The amount that you learn about day-to-day operations and how to make a business operate more smoothly with hands-on practice and real money on the line beats anything I’ve ever learned in a classroom.

It also taught us that a business could make money, even grow, while not having a lot of processes that make it more operationally sound (and much less of a headache to manage). For example, we set up a ticketing system to help organize the requests our VAs made to the developer. They had previously just put the requests in Slack, but this led to them getting lost, no clear prioritization, and overall confusion about what the ask was. And then another lesson in change management, as the VAs continued to put messages in Slack and use the processes they were familiar with. It takes coaching. And time. But the result was golden, a clear list of all the bugs and technical issues that needed to be addressed that we could then prioritize for the developer we worked with.

We failed at stuff too. The website of the business was/is crazy outdated. Like surprised people are throwing their credit cards on this site outdated. But as we saw through the payment processor statements, that didn’t matter to a ton of clients. Still, we thought we should update the site. But when we started looking into how much that would cost we were shocked. 10s of thousands of dollars for a new website sounded insane. So we set out to try and do it for cheaper. We hired a designer in Pakistan and he gave us CLEAN designs for a new site. Then hired a low-cost developer in India. Didn’t work out. Then another. Didn’t work out. And another. And another. We spent thousands of dollars and wasted months to “save” money that we didn’t really end up saving. The website was an eternal “ few weeks from being done”. A huge lesson in paying the pros to do the stuff you can’t.

In the interest of you hopefully finishing this blog post, I won’t list everything we learned. Way too much for that. We had a lot of wins. New processes and technology that worked out. Made the job easier for us as managers and for our employees. We also learned a lot from some failures. Stuff that wasn’t really needed that we spent money on. Or things we tried to shortcut and be stingy on that we never got to see come to fruition. A full breakdown of what we learned would take up multiple blog posts so I’ll keep going with the story.

Selling the Business

Fast forward to this past fall and winter and we essentially had the business on auto-pilot. The VAs we had on staff could handle every request that came in and we seldom had to intervene in the day-to-day operations of the business. We monitored the financials and held meetings weekly to chat about the business, but eventually, we reached a point of stagnation. Operationally and financially everything was good, but we weren’t making headway on the website. We were profiting 5 figures per month but didn’t really know how we could gain new customers. We had raised prices multiple times so despite not growing the client base, we were profiting a lot more each month than when we bought it. We even used some of those cash flows as the downpayment toward the purchase of a digital marketing agency. But what should we do from there?

We had mixed feelings. The growth in revenue and profit meant that we could sell the business for substantially more than we bought it for. But we could also keep it because it was going well. If we kept it, we wanted to grow it. But how would we do that? We weren’t sure. How much more resources would we put into designing a new site? Would we be better off selling and using the profits to buy another business with a clearer growth plan? Selling would mean insane returns. Maybe we could use leverage (a loan) on another business to do it again?

We went back and forth on this. For months we tossed the idea around. Then eventually we decided to test the market. See what we could get. We listed the business with the same brokerage that we purchased it from. But now the business was making more money and a new owner wouldn’t have to put any time into it if they didn’t want to. It was an ideal acquisition target. So we listed it.

Not long after, we started receiving offers. Great offers. We started getting cold feet. Actually, I won’t even say we, but my feet were feeling frigid. If we’re getting offers like that, what type of asset are we letting go of? How much more could we get? Is this a mistake?

We debated this among ourselves at length. These are real fears, but they are hypotheticals. Maybe in the future, it will look like a mistake. But then again what if the business failed next year and we couldn’t make loan payments? We knew we were getting a great return. We knew the buyer was buying a great business. And we knew it would deepen our relationship with the brokerage we were working with. It would also lower our total debt profile as we could pay off the loan. All that and we would have the money to buy 5 businesses the size of the one we had purchased if wanted to.

So cooler heads prevailed (and convinced my hot one) that we were making a good decision given the circumstances. So in April of 2022, after a year and a half of owning our first business, we sold it and along with the cash we built up, we profited handsomely even with broker fees, legal fees, and all the other little fees that cut into the pie.

More than a 400% return in a year and a half. WE DID THAT.

Looking Forward

From 1965 to 2022, Berkshire Hathaway had a compound annual growth rate (CAGR) of about 20%. From 2000 to 2020, Amazon.com grew at nearly an identical rate (a little lower if you use their current stock price). These are some of the best companies of all time. Some of the best returns of all time. Sustaining a 20% CAGR puts you in elite company.

I’m not saying we deserve to be mentioned in that group. We don’t. We haven’t proved much yet. Haven’t done it for long enough. But we’re young. And returns like these are special. So I did want to take at least one chance to gas us up a little bit.

That all being said, you can’t use the result to determine the quality of a decision. There are a lot of other factors. Our results were great. Incredible even. But objectively we could’ve done way better. We never improved the website or made any fruitful outbound marketing attempts.

We learned an incredible amount through the experience and we’ll use everything we learned to try and go even crazier in the future (the new website on the second acquisition is already done). But time will tell how it all goes.

I don’t know if I’m a great investor or businessman yet. I don't even want to claim that yet. But I can claim that I make shit happen. That we make shit happen. And I am going to put the work in to make the claim that I deserve those other titles too. And when more wins come in to validate that be on the lookout for me talking my shit. And working with guys like the ones I’m privileged to be in business with, I like our chances.

Note:

If you know me, you know when I tell stories I’m long-winded and mad detailed. When I wrote the draft for this blog, I was both of those things. However, when we sold the business, we had to sign a NDA that prevents me from publishing material information and details about the business or the sale (such as specifics of revenue, costs, sale price, name of the business, etc.). So if some stuff in the post seems vague, just know it was written that way purposefully.