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A man in his 60s slides a folder across the table and says the price out loud for the first time in his life. You have $90,000 and a name nobody recognizes. By the end of this, you'll own 20 companies and a half billion dollars of other people's life's work. He spent 31 years building this business >> [music] >> and the part nobody warned him about is that there's almost no one left to sell it to. Four out of five businesses that go up for sale never close a deal. So, the folder slides towards you, not because you're impressive, but because you showed up. That folder is the first rung >> [music] >> and the reason most people who reach for it never make it past the second is sitting right across from you on the seller side of the table quietly [music] testing whether you'll flinch. >> [snorts] >> Level one, the searcher. [music] You are 31. You have $90,000 in savings and [music] a spreadsheet of 900 businesses you pulled from broker listings and county records. You are not buying anything yet. You are looking. And looking is its own job. One that happens to pay nothing. The model has a name [music] now. They call it self-funded search and the math is brutally honest. You want a business throwing off about a million dollars a year in what gets called seller's [music] discretionary earnings. The cash an owner actually takes home. >> [music] >> Businesses that size trade for roughly three to three and a half times that number. So, you're hunting for something with a sticker price near three and a half million dollars. You have 90,000. The gap between those two figures is the whole problem you have to solve. You learn to read a profit and loss statement the way a mechanic listens to an engine. You learn that the owner who built it has been [music] running his personal truck, his wife's salary, and a boat through the business for a decade. And that untangling the real number from the story he tells himself >> [music] >> is the actual skill here. Every dollar of those add-backs you can defend lifts the price a buyer will pay by three or four. So, you learn to fight for each one and to throw out the ones that won't survive a banker's questions. You drive 4 hours to meet a man who makes industrial filters and sells you nothing. Because all he really wants is to be talked out of retiring. You also learn the difference between the deals everyone sees and the ones nobody does. The broker listings come pre-shopped, picked over, bid up by people with more money than you. The real edge is proprietary. The owner who hasn't decided to sell yet. The one you reach before >> [music] >> there's a process and a bidding war. So, you mail the people who never raise their hand. The first business you fall in love with dies on the operating table. The numbers look clean until you ask one boring question, "Who are your three biggest customers?" And the answer [music] is that a single account is 60% of revenue and that customer's contract is up for renewal in 8 months with nobody else close behind it. That isn't a business. That's one phone call away from being nothing. The bank would never lend against it and neither should you. You walk and it costs you 2 months and a lawyer's bill and you learn that the deals that fall apart teach you more than the ones that hold. This is also where most searchers quit. Somewhere between the 10th dead deal >> [music] >> and the morning it lands that nobody is going to hand you anything. You send 41 letters in a month. You get two replies. [music] One of them is the folder. What you don't know yet is that the folder will cost you everything liquid you own plus your name on a document you can never undo.
Level two. The buyer. The folder turned into a number, and the number is $3,800,000. You are 32. You do not have $3,800,000. So, you learn how a person with 90,000 buys something for almost 4 million. And the answer [music] is that you don't buy it. The bank does. You just sign for it. The instrument is a government-backed loan [music] called an SBA 7A, and it will lend up to $5,000,000 against a business acquisition. The structure is a stack. The bank funds about 80%. The seller himself carries a note for 10 or 15%, which means the man across the table is lending you part of his own asking price, >> [music] >> and betting on a buyer he just met. And you write a check for the last 10%. 10% of 3,800 is $380,000. [music] You have 90. You raise the rest from two old colleagues who get a slice of the company for it. >> [music] >> And your savings account drops to almost zero in a single wire. Then you learn the trick that buys you breathing room. Under the loan's rules, the seller's note can count toward your own required equity, but only if it sits on full standby, meaning he can't collect a dollar of principal or interest on it for the first [music] 2 years. So, you ask the man who built this over three decades to wait 2 years before he sees a cent of that piece, and he agrees because he wants the deal to clear as badly as you do. That standby note is the difference between a deal that funds and one that doesn't. But, before any of it funds, the bank sends in accountants to pull the numbers apart, a quality of earnings review, >> [music] >> and they find that the seller has been counting a chunk of next year's deposits as this year's revenue, which quietly shaves the real earnings and very nearly kills the price. >> [music] >> And there's the working capital peg, the part nobody warns you about. Where you have to argue over how much cash inventory and unpaid invoices the seller has to leave inside the business on closing day. Because if he sweeps the accounts on his way out, you inherit a company that can't make payroll in week one. You win that fight by inches. Then the lawyer slides one more page across. Because you own more than 20%, you sign an unlimited personal guarantee. The bank [music] takes a lien on your house. If the business dies, you don't just lose the business. You lose the place [music] you sleep. You sign anyway. The seller shakes your hand and [music] for the first time you notice he looks relieved, not richer. You are 32 years old and $3 million in debt and tomorrow you have to walk into a building full of people who have worked there longer than you've been an adult and tell them you're in charge now.
Level three. The operator. [music] The first morning, nobody looks at you. You learn exactly what a name on a loan document is worth on a shop floor, >> [music] >> which is nothing. The general manager who has run the place for 19 years answers your questions like every [music] answer costs him something. And the woman who does the billing has a faster read on the company's real margin than you do. This is the level that kills most people and it kills them quietly. You took on $3 million of debt to buy yourself a job. Your salary is $200,000, but the loan eats the cash before you ever see it. You learn the only number the bank actually watches, debt service coverage, the ratio of cash the business throws off to the loan payment it owes. The bank wants that cushion >> [music] >> at roughly one and a quarter. The month it dips under one, the cushion is gone, and the payment is coming out of money the company doesn't have. So, you do the unglamorous things. You raise the prices the previous owner was too kind to raise. You fire the customer who's been [music] paying 90 days late since 2009. You sit with the 19-year general manager at a diner, and you don't pitch him. You ask him what he'd fix if it were his, and you do three of the four things he says. And on the fourth morning, he starts looking at you when you walk in. By year three, the business throws off enough that after the loan and taxes, you're clearing close to $800,000 a year. The debt [music] is shrinking. The lien on your house is still there, but the fear has dulled into a number on a statement. And that's the trap [music] of this level. You are comfortable. One business paid out. A clean 800,000 a year. Most people stop right here. >> [music] >> And a quieter version of you would, too. But the folder taught you something the comfortable version doesn't know yet. There are 10,000 more owners turning 65 every single day, and you just learned how to swallow one.
Level four, the acquirer. You are 36. You own one business outright, and you're about to do something the bank would have called insane four years ago. You're going to buy a second one, then a third using the first one as the engine. The mechanism is the thing nobody sees from the outside, and it's the whole reason a holding company exists in the first place. You buy companies one at a time at three or three and a half times their earnings. Because at that size, the price is tied to one tired owner and his discretionary income. But the instant two or three of them sit under the same roof with shared bookkeeping, shared trucks, shared back office, the combined thing stops being priced like a Main Street shop and starts being priced like a real company. The same dollar of profit that was worth three times inside a small business is worth six or eight times inside a bigger one. You aren't getting smarter. You're buying the same earnings cheap and holding them somewhere they're worth double. That spread has a name. They call it multiple arbitrage. And it's the closest thing to free money in the entire [music] economy. This is where you stop being an operator and become an allocator. You hire a CEO to run the first business. You hire a controller to keep the books across all of them. Your day is no longer the shop floor. Your day is the next deal. The next loan, the next seller in his 60s deciding whether you're the one. But you're also borrowing against borrowing [music] now. Each new acquisition adds another personal guarantee with your signature on it, another lien, [music] another business that has to perform or the whole stack starts to lean. One deal closes in March with a roofing company whose owner dies of a heart attack six weeks after the sale and his foreman quits the same week. And just like that, you own a business with no one left who knows how it runs. The cushion you spent four years building goes thin in a single quarter and you're awake at 3:00 a.m. doing math you've already done a hundred times hoping it comes out different. If you've made it this far, you're exactly who this channel is for. A subscribe helps me keep making these. No pressure, but I'd appreciate [music] it.
Level five. The builder. The roofing company survives because you promote the dispatcher who actually ran it and double her pay before she can think about leaving. You are 40. You own eight businesses now. And the thing you've built has a name and a floor of its own and a real title on the door. It is no longer a collection of deals. It's a holding company. The shift at this level is that you stop buying companies and start building the machine that buys companies. You set up a central management company that sits above all eight businesses. It handles the accounting, the insurance, the hiring, the financing, all the parts of running a business that every single one of them was doing badly and alone. Each company pays a management fee up to the parent for those services. That fee is how the cash climbs from the businesses on the ground into the holding company at the top. And it's structured and taxed so the money pulls where you can aim it at the next deal. You learn the cruellest, most useful trick in the whole model now. Once a business you bought has paid its original loan down, you refinance it. You put fresh debt back on it and that new borrowed cash gets paid up to you as a dividend while you still own 100% of the company. They call it a dividend recap. It means you can pull your original 90,000 back out. Many times over without ever selling a thing. The risk goes back onto the business. The cash comes home to you. You have a choice to make here and it's the real one. >> [music] >> Every voice in your industry is telling you to package the eight companies, hire a banker, and sell the whole platform to a private equity firm for a number with a lot of zeros. >> [music] >> The other path is to never sell. To hold these forever. To compound. There are people who built exactly this and chose to hold for 30 years instead of cashing out because the businesses keep paying every year and a sale only pays once. You sit with both numbers on a Sunday and you make the call that decides what the next 20 years of your life actually are. >> [music] >> You don't tell anyone which way you're leaning. Not yet.
Level six, the holding company. You hold. That's the call you made on that Sunday and never announced. And it's the whole reason any of the rest of this happens. You don't sell the eight companies to anyone and you don't sell the next 12 either. You are 47 now. >> [music] >> The half billion in the title is real and it does not look like anything you imagined at 31. 20 companies. Filters and roofing and an HVAC business and a commercial laundry and a pest control route and a regional plumbing operation. None of them glamorous. All of them throwing off cash. Together, they do hundreds of millions in revenue and the equity you own across the whole structure is worth roughly $500 on paper. >> [music] >> One real world version of this model runs 16 companies, 350 million in revenue >> [music] >> and 50 million in free cash flow a year and never plans to sell a single one. You can see the whole board now >> [music] >> and the view from up here is the part the comfortable version of you at level three could never have seen. The private equity firms have noticed what you noticed. >> [music] >> Apollo owns a home services roll-up. Blackstone [music] bought one platform reportedly at over 18 times earnings. They're running your strategy with billions [music] instead of a wire from your savings account and they're paying multiples you can't match for the same boring businesses you used to buy for three times earnings. The water you fished in alone for 16 years is now full of much larger boats, but you have something they structurally cannot have. They run on a clock. A PE fund buys the platform, bolts on add-ons for 4 to 7 [music] years, and then has to sell because its investors were promised an exit [music] and a return. You promised no one anything. You can hold forever. You can keep a 70-year-old founder's name on the door because you're never flipping the building. >> [music] >> So when a seller in his 60s slides you the folder now, you can tell him the one thing no private equity buyer can say, >> [music] >> that you will not gut his company in 3 years to dress it up for the next buyer. That one sentence wins you deals that money [music] can't. You make the largest acquisition of your life this year. And at the closing table, the seller is your own age. And he looks at you across the folder the way you once looked across it from the other side. You realize you've become the person you were terrified of at 32. And you still haven't answered the question of what any of this was for until a much older man makes you answer it. Go back to the first folder. The man in his 60s who slid it across the table 16 years ago. The one who looked relieved instead of richer. You stay in touch with him the way you don't with most sellers because he was the first. Over a lunch he insists on paying for, years later, he tells you the thing he never said at the closing. He had three [music] other people look at the business before you. Two were bigger and better funded. They offered more money and a faster close. He turned them both down because both of them told him, in the polite language of the industry, that the first thing they'd do is replace his people and sell within 5 years. There are $10 trillion of business value sitting in the hands of people his age right now. And the entire economy is built around treating that value as inventory to be flipped. He didn't want to be flipped. He wanted his 31 years to keep existing after his name came off the lease. So, here is what the half-billion-dollar climb actually cost. And the bill didn't land where you'd [music] expect. The cost is structural, and it sits on the seller side of the table, not [music] yours. Every year, a vast number of these businesses don't sell to anyone and simply [music] close. Millions of them will hit the market this decade. And four out of five will never find a buyer. >> [music] >> And when they close, the jobs and the routes and the 31 years of one man pouring his own foundation just end. You didn't win because you were the smartest allocator in the room. You won because you were willing to promise the one [music] thing nobody with real money will promise. That you'd let the thing keep living. That's the quiet question the whole industry produces [music] and never answers. The economy needs someone to catch the 10,000 owners who age out every day. It rewards the buyers who promise to flip them fastest. And the man who built something real for three decades [music] has to bet his entire life's work on a stranger's word about what happens after he's gone. You kept your word to the first one. The folder is still [music] in your files. And you are not sure, even now, at the top of a $500 million holding company, that the system would ever have let you climb this high if you'd been just a little more honest about how much faster the money comes when you don't. >> [music] >> Watch this video if you've ever wondered how the people quietly buying up every small business in your town actually got their start. Go watch our episode on every level of a family office, >> [music] >> and see where this money goes once it finally stops needing to grow.