Buy A Practice With No Out Of Pocket Expenses… That Cash Flows Right Away… And Pays For Itself In 3 Years
- On September 25, 2017
We have stated many times the opportunity of growth through acquisitions is the king of all growth strategies.
Acquisitions allows for rapid growth over years by acquiring $50MM, $100MM, $250MM+ in assets at a time.
While growth through acquisitions isn’t going to be the right strategy for every advisor to deploy, from a financial perspective, it’s beyond compelling.
Let’s take a local acquisition example where you are NOT adding staff, office space, or to overhead costs by acquiring the additional clients.
You’re acquiring a $500K recurring revenue practice for $1.2MM sales price.
You get a loan for a 70% down payment and the seller takes a note for 30% of sale for 3 years.
You roll in bank origination, cost of business valuation and closing costs into the loan for $20K
The bank note is at 6.5% fixed rate and amortized over 10 years while the seller note is at a 5% fixed rate amortized over 3 years.
Let’s also assume for this example that you have a 90% revenue retention, losing 10% during the transition, leaving you with an added $450K in annual recurring revenue.
The cash flow from this acquired practice will pay for itself in about 3 years
Borrow $860K down (70% + closing costs) from the bank and $360K (30%) from the seller.
The bank loan will be about $9,700 per month and the seller note about $11,000 per month (because it is over 3 years).
This means you are carrying about $20,700 in monthly debt service for the acquisition during the first 3 years. The $450K in recurring revenue is generating $37,500 in average monthly additional cash flow. This puts you in a positive $16,800 monthly revenue difference after the first couple months of transition.
The practice is paying for itself and you’re making a nice return even in year one.
After 3 years the seller note drops off adding another $11,000 to monthly revenue to push you to $27,800 net monthly revenue over the debt service cost of $9,700 per month. While you can continue the loan for the remaining 7 years, the cash flow generated from this acquisition will be sufficient to pay for itself in about 3 years.
If you’re getting a 90% payout on the $450K use $405K or $33,750 monthly cash flow minus $27,500 monthly debt coverage service for monthly difference of a positive $5,950 per month for 3 years then a positive $24,050 monthly cash flow when the seller note drops off. The practice pays for itself in just over 3 years.
Without having to come out of pocket one dollar at closing (excluding your lawyer and business valuation expenses) you now own the client base free and clear after 5 years, that would be valued over $1MM by itself, while also pushing your total practice value to higher multiples from being a larger practice.
The bigger the recurring revenue the higher on the valuation scale your practice gets valued. A $2MM revenue practice is valued on different ratios and multiples than a $500K practice for example. An acquisition, depending on the size can provide the extra benefit of increasing your practices value from the added revenue pushing your market valuation multiple upward or higher EBITDA multiples.
Of course, the example changes as variables change.
Need financing for an acquisition? Contact AdvisorLoans today.
Join our list
Subscribe to our mailing list and get interesting stuff and updates to your email inbox.