Thread by @Sam_Rosati

Been getting the 'how do you buy a portfolio of micro SMBs?' question a lot recently, esp from 1st time searchers. My answer: simple math makes it hard, but if you can play the long game, it gets easier. (math below is rounded + TONS of assumptions = keeping it simple)

$500k SDE x 3.5 SDE multiple = $1.75M purchase price. Using 90% SBA loan (ignore seller note) = $1.575M loan @ 5% = $200k/year debt service. So, $500k SDE = $300k of FCF after debt service.

But SDE means FCF before paying the owner's comp...what if he/she (seller) was active? Then adjust the post debt service FCF for his/her replacement...which is probably you (buyer). How much is that adjustment? Depends, but let's say $125k/year.

Now FCF is $175k/year before CapEx, NWC buildup, etc.
FCF is inevitably volatile and you have a $1.575M loan. So, instead of quickly moving on to the 'next deal'...it makes more sense to operate your biz for at least a few years, learn, improve, pay down debt and grow SDE.

If you'd be happy w/ 5 businesses after 15 yrs, then you have 3 yrs/biz. This makes it a LOT easier, even w/out growth: operate for 3 yrs, pay down debt ($200k/yr plus $100k/yr of excess FCF), so your loan is down to ~1x SDE after 3 years + you have the cash equity for biz #2.

Plus, after 3 years, you understand the biz and can "manage remotely" more effectively. Take the $125k/year of owner comp you were paying yourself, use it to hire a quality operating partner, and start searching for biz #2.

One "trick" that might help early on: find a biz where the owner is passive (not operational) and there is a long-tenured GM that will stay (use some FCF and/or equity to incentivize). Then, you don't need to necessarily ding the FCF for the full $125k/year (from example above).

Plus, with the "passive seller + tenured GM" dynamic, your (buyer/new owner) efforts in the biz are 100% supplemental instead of necessary as the active owner replacement. And you have the GM's knowledge and know-how to keep the train on the tracks.