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Action Academy | Millionaire Mentorship For Your Life & Business
Our $18M+ Business Rollup Strategy Explained (In Only 18 Minutes)
00:19:02
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- [00:00]
A
If you've been spending years buying rental properties to escape the rat race, you're doing things the slow way, you're doing things the old way. This is what I used to do too. I used to save up my money for my corporate job, buy a rental property, move in next year, save up my money, do it again year by year by year. After four years, I only had four doors. The strategy that we're about to tell you today in the next 18 minutes will blow the freaking doors off of your doors. Today we're talking about the pivot of going from rental property investing to small business acquisition. And not only just for six figures of cash flow, but also through what's called the roll up strategy, which is what we discuss step by step in this video, what we're doing in our own deals inside of our own portfolio today. And at the end of this video, you'll see our tried and true proven path that we are doing to generate $3 million of profit for our business to exit at a 6x multiple for $18 million. So if you sit with me for the next 18 minutes, I teach you how to make $18 million. Let's get to it. Let's get into the deals that we've done so we can add a little bit of value to these people.
- [01:03]
B
Yeah. Pearson Charbonneau, born and raised in Kansas City, went to college, came right back for an internship based in Kansas City. I ended up working for that company that I interned for in college for nine years. I started doing events and marketing kind of stuff and decided that there were a couple business lines I wanted to start. Built up a bunch of lines of business for em, made them a ton of money and did not make very much in ren return. The business when I joined was struggling, not profitable. We joked it was the least profitable for business in Kansas City and then we ended up making some money. They sold the private equity and my life became terrible.
- [01:43]
A
Anybody else in the chat, have you guys experienced that? Because especially right now, a lot of companies are either firing to replace with AI and they're like reducing headcount or it's selling to private equity. So as soon as that happens, it's like things change a lot.
- [01:57]
B
Yeah, changed a lot. It went from very fun to not so fun. I kept getting promotions and slightly more money and working way, way more. So I was probably working 75, 80, sometimes 90 hour weeks by, by the time I left there. I joined Action Academy originally thinking that I wanted to expand my rental portfolio. I had a handful of rentals and it was just not going fast enough. 200, 300, 400 bucks a month on cash flow for rentals was not get me to 10,000, $15,000 a month that I wanted pivoted. I started hunting for businesses to buy and operate because I knew I had a skill set built up, just needed to find a deal and find some money. So I hunted on Biz by self for a few months, found my first deal, got under contract, brought the deal to action academy, and raised all the money I needed to take it down within, what, 20 minutes, 15 minutes.
- [02:51]
A
And so that's actually a funny story because Pearson had been posting about his journey in the group. And I'd say about 65% of the group is like operators like you guys. And also just by law of big numbers, like a handful of you guys just want to passively deploy capital. So that's about 35% of the group is just people with hundreds of thousands of dollars laying around, either in a 401k or in cash. And they just want to put it into businesses for a 20% passive cash on cash. And so that's one way to do it. And then another way is like the other 65% are active operators going and finding deals. And so I remember I was laying by the pool in the middle of the day when I got the call from one of our other members, Jordan, and he was like, dude, just got off the call with Pearson. He's got a crazy deal. He's about to post on Facebook. Call him right now, do the deal. And I remember I called you maybe within five minutes, and I was able to get on. On the deal. So it's all speed to lead, baby. So it's. It's a good time. And so we are able to close on that deal. And so walk through how you found the deal and how we financed the deal.
- [03:52]
B
Yeah, so found the deal on Biz by sell. I really was. I wasn't expecting to find anything good on Biz by sell. Everybody knows that's where deals go to die is what I thought. I found this one. I'd been making offers, sending Lois underwriting, and really found this deal that resonated with me and my skill set and what I was good at and the connections. I already had, talked to the owner, got details, went under contract. Like Brian said, he. He got the deal, but I think I had probably 25 or 30 people reach out to me within an hour to fund it. We put together a pitch deck and shared it with a group. And yeah, we ended up negotiating 90% seller financing. So to whoever said that in the chat, money is the problem and seems not many want to do owner finance. We've done two deals that have heavy seller finance and the new one that
- [04:38]
A
we're doing is 30% seller finance. Yeah, yeah.
- [04:42]
B
6% interest. So, yeah, very crazy. The other One was a 15 year note, fully seller finance deal with 10% down. So it's out there. You just need to find the right deal, find the right seller and be able to negotiate the terms you need.
- [04:56]
A
Can you talk about the importance of really quickly the how we did for both deals? So we did the first deal is we did 90% seller finance and then I basically brought the working capital. So you guys are able to be in there like very low to no money out of pocket. So I think a lot of people don't understand that's an option. It's. And I'll give you guys like the real, real. How much money should somebody have in their bank account even if they're using a capital partner? I think like 20, 30 grand is like a decent starting point alongside business partners, not just doing it solo. Would you say about. That's about the same?
- [05:32]
B
Yeah. I would have a handful of months of Runway plus whatever capital you're ready to dump into this. I think if you've got 3, 30, 30,000 to put towards a deal, that's about a safe place to be, 20,
- [05:43]
A
30 and that's also alongside a capital partner. So that's super important because the deals that we look at are normally between 1 to 3 million dollars. Now that's one of the big lessons that Pearson and I learned from this first deal was let's go bigger. And you guys will see that reflected in our acquisition afterwards. But the first deal was 900k profit. It was about a 4 or 5x multiple. Is that correct?
- [06:08]
B
Yeah, we originally thought it was 300, 300,000 and it ended up being like 275. So I think we're at 3.4, 3.5 maybe.
- [06:16]
A
Yeah. So a 3.4x multiple post in the chat. Do you guys understand how businesses are valued or do you need us to explain? So yes or no, do you guys understand how businesses are small businesses are valued. Post a Y or an N in the chat so we can know if we need to dive deep. Okay, so a lot of no's. Okay. Shout out Coco. He said yes. Shout out Carlos. Yes. Cool. So businesses are valued at multiples of net profit. So when you have a business, you have revenue, which is Money that's coming in as like gross. It's called gross or top line revenue. And then you have profit with which is what is left over. All right, so businesses, small businesses in particular, sell at a multiple of cash flow. So it's going to be called sde, seller discretionary earnings. When you hear SDE or you hear us talking about that or you hear like seller, like again, seller discretionary earnings, just think profit. That's all that means. And then when you do above a million bucks a year in profit, that becomes ebitda. So you start talking in terms of EBITDA when you're about over a million bucks SD beneath a million bucks of profit, it's called sd. And that's because a lot of business owners will shield profit because they don't want to pay taxes on it. Does that make sense for anybody that's got real estate in here? It's oh, I bought this work truck or I bought all this stuff or my wife's working for me in the office or I've got all this equipment and we went to Cabo and it was a business trip with the family and my kids work for us too, blah, blah, blah, blah, blah. So SD is a little bit more squirrely. So that's why it's the profit of the business plus the owner earnings, plus what are called ad backs. So add backs. I don't, we don't need to get too deep into add backs. But add backs are basically like all the things that the business owner, the seller is going to say, hey, this shouldn't be an expense. I just did this so the IRS could kick rocks. Like this is actual profit in the company. So the easiest way to explain it is that when you buy a business, you buy it on basically think about it as years of profit in advance. So if you, it's like normally a 2 to a 5x multiple. Okay, so any deals that you guys are looking at. So a 2x multiple for a business would be a pretty crappy deal. A 3x multiple is a pretty market average deal. A 5x multiple is a very well packaged or very popular asset, if that makes sense. So let's do a quick quiz here so that you guys, I can make sure that you guys are dialed in with the money math here. If I have a $300,000 business that is at a 3x multiple, what is the valuation of the business correct? $900,000. And if you have a $500,000 profit business that's at a 5x multiple, what is the valuation of that business, 2.5. Now, if you guys want to play ball here, you want to have a lot of fun, what's $500,000 of profit? And at a 6x multiple? 3. Right. Cool. Yeah. And what's a 5? $500,000 at a 7x multiple. 3.5. This is called multiple arbitrage. So not only can you increase the profit of the business, there's two ways that you increase value of valuations of business. The first way that you increase the valuation of a business is you increase the profit at the current market multiple that you bought it at. Does that make sense? Are you guys tracking with that? Yeah. Okay, beautiful. So if I buy a company for $300,000 at a 3x multiple, which is basically the first deal that Pearson and I were talking about, and now we increase that to $500,000 of profit at a 3x multiple, we took the business valuation from 900,000 to 1.5 million. Okay, so that's good. But if we take that business and we go from a 3x multiple to a 5x multiple of profit, so not even increasing just the profit, we're increasing the multiple. Then that same business, for every $200,000 of profit we add, is a 5x multiple of that profit. So every $200,000 of profit we add is $1,000,000 in equity created in the business. How do you change the multiple? Rania, I'm glad you asked. You can hang out with us, because this is what we're teaching you tonight. Pearson, how do you increase the multiple of the business?
- [10:37]
B
Make more money, implement better systems.
- [10:39]
A
Implement. And then how do you do that? There's two ways to do it. You can generate more profit or you can buy more profit. So how do you buy more profit in the company?
- [10:48]
B
Yeah, so that's. It's exactly what we're doing right now. So you find businesses who are doing either exactly the same thing you are doing, who are competitors, or in different markets doing the same thing, or find businesses who are doing slightly adjacent things, buy them, and then roll it into your business. You combine the P Ls and you increase the profit. It's called inorganic growth. And in the higher the profit you can grow to, the higher the multiple will crawl to.
- [11:15]
A
Yep. And so if you guys think of private equity, this is what they do straight up. And so the game that we play is private equity doesn't normally play beneath a $5 million profit company. So once you're 5 million in profit, your multiple goes from like a 5x multiple to an 8 or a 10x multiple. Typically around an 8x multiple. Why is that? Can some of you guys post in the chat? Like, why do you think that it would go for $5 million of profit? Why would the multiple increase? Why do you guys think? Different tax bracket. Profit and loss is P L capital. Okay, these are good ones. Economies of scale. Risk lowers. Boom. Louie. Nailed it. That's really good. Consistent. Higher profit gives more years of profit leverage. All right, these are all really good ones. The reason why more profit equals better multiples is because the business is easier to manage. Because if a business is doing $5 million of profit, it means that it's a very well packaged company. And it's. Yep. Company's not as dependent on the owner as it is at $500,000 of profit. So what we do in Action Academy is we don't try to compete with private equity up here. We play down here. So there's a lot more areas for improvement here. But what we do with Pearson, this is called the roll up strategy. Have you guys heard of the roll up strategy? This is what private equity does, but we just do it. We do it at a smaller level. Okay, so what private equity does is when you think of pe. Yeah, on my podcast. Exactly. Louie, I like you too. So private equity does is say that you have 10 different plumbing companies in the same market, and each plumbing company does. We'll call it five plumbing companies, and they do $2 million of profit each. Instead of taking one plumbing company and 5x in the company from 2 million to $10 million of profit, they will just go buy all five of the plumbing companies and they'll combine them all into one company that has $10 million of profit. And so if you buy each one of these companies for a 3x multiple, a 2x multiple, a 4x multiple, a 5x multiple, and you combine them all together, then all of a sudden you've got this $10 million company that's now valued at $80 million by crunch and Planet Fitness. Boom. Max. You got it. So that's an $80 million company from 5 Acquisition. This is the roll up strategy. Okay, so this is what we're doing with kitchen hood cleaning companies. So instead of me, while Pearson is organically adding hundreds of thousands of dollars of profit, we're also buying other companies to absorb them into our profit to bring us from a 3x multiple to a 5x multiple. Does that make sense? Did I explain that? Can I get a Y in the chat? Okay, thank you, guys. Thank you. Thank you. So Pearson, we are going from 3x multiples to now a 5x multiple from this new acquisition. What does that mean for our cash down?
- [14:15]
B
Yeah, so once you get to this level, banks are way more likely to lend on what's called a cash flow multiple. So in the past, they have lent to us on revenue multiples, basically a three times valuation of our business. Now that we're going to have over, I think it'll be 1.1, 1.2 in profit annually. They're starting to lend to us at a five times cash flow. And what that allows us to do is continue to buy businesses at a three times multiple when they're valued that way because they're smaller. And immediately day one, on closing day, we get two times more worth of equity, basically. So we're buying it a three, and then the day we integrate it, we are five times the cash flow.
- [14:58]
A
Yeah, exactly. And so tell them a little bit about the new deal that we just got. What was it, 2.7?
- [15:04]
B
Yep. This new one's under. Under contract for 2.7. 30% seller financing, 6% interest. It's a great loan. What we're able to do with the bank is refinance all of our existing debt and roll it into what's called a cash flow loan, where they're valuing our business now at a five times multiple. So they're willing to risk anything that we buy under that. Basically given the business is strong enough
- [15:30]
A
that we're looking to buy, and now we can take that additional manufactured equity and use it as the freaking down payment. And that's how you buy a $2.7 million business for free. Do you guys get it? Is that tracking? It's very complicated stuff, but I hope I'm doing a good job of explaining this to you guys. I told you we're giving you game. I told you I was going to earn you booking a call with freaking Action Academy. Okay, we just gave. That's a $2.7 million strategy. All right, we're one time, one more time for the last part. Okay, so Raya. I think it's Raya or Raya. I'm going to say Raya for right now and then you can correct me later. So when you. So if we have a business that we just bought at $500,000 of profit, right. For a 3x multiple, then that would be, just to use an example, that'd be a $1.5 million business valuation. Okay. So what we're saying is because we're adding the profit that we're Buying to our current profit, which then makes the pie of profit larger that $500,000 for that same deal. For us, owning it and absorbing it into our other companies is not worth three times. It's worth five times. So we're buying it at three times. So you're buying it for 1.5 million. But for us, because we have other companies, that deal is worth 2.5 million. And so what does that mean? It means a million dollars of additional equity. And what does the bank say? The bank says, you know what, that equity seems good to us. Why don't we use that as the down payment? We don't need you to bring cash to the deal. We want to use that equity as the down payment. We're cool with that. It's on paper equity. And you guys are talking about buying a plumbing company to replace $10,000 a month. Like you guys are just trying to leave corporate. This is the game. This is it. And so take a company like Action Academy. Like, we're a eight figure company. If I do action for Action Academy, if I do freaking $5 million. Can you please mute you please mute them. Thank you. Thank you. If we do $5 million of profit for Action Academy, that's probably an 8x multiple. What valuation does that put Action Academy at? $40 million. This is how business works. I've done this for three years. Pearson, how long have you been buying businesses? Two and a half. Yeah, Action Academy is three and a half years old. Pearson's been doing this for two and a half years. And you guys, how many years did it take you to buy all the rental properties? Pierce? And it took me four years to buy four rentals. You?
- [18:07]
B
Yeah, same.
- [18:08]
A
Okay, so do you guys realize that time's going to pass regardless and perhaps it's a wise time on this webinar tonight to stop focusing on buying perhaps another rental property or an air or an Airbnb and you focus on this strategy instead and you get real good at it. And boom. That is the ending of a roll up training today. Ladies and gentlemen, this is a short clip from a two hour training session that we did on the roll up strategy that we are implementing. If you guys want to learn how to do this stuff, not only how to do it, but but how to partner on it, how to raise capital for it, and even. We'll introduce you to the capital partners to pull this off, check us out@actionacademy.com Pearson was a prime example of somebody that joined the group, pulled this off literally in front of your eyes and eardrums right here. Check us out. And, of course, share this video with somebody that you think could get value from it. See you guys soon.