Billy Murphy wrote:
Such deals are nowhere near as easy to find as suggested in the article.
yes they are.
No, Billy, they're not.
You see, I understand that the market is efficient. If low-risk, 1 x earnings-multiple deals were plentiful, people would snatch them up until they weren't plentiful anymore. Thus, they cannot currently be plentiful.
The market has collectively decreed that the risk involved in owning a small business commands a premium equal to around 2 years of net earnings. That's how the market generally values businesses. Of course, this varies based on the probability that the business will succeed. Things such as the age of the business, experience of the management staff, local competition, market trends, and so on. But risk is directly tied to return. Making your money back in a single year's earnings is considered a very high return. Thus, it correlates with a high risk. Steady, reliable, rock-solid companies provide a more guaranteed revenue stream, and thus trade for much lower multiples. It may take 5 years to get your money back from purchasing a small credit union, but it's been around for 35 years and is the only one in the tiny town, so it's a pretty safe bet.
You are claiming you can get the low-risk, virtually guaranteed return of a bank, in the ridiculously short period of 1 year. That's simply not true, for two reasons. Firstly, someone else would outbid you. They'd offer 1.5. Then you'd counter with 2. Eventually, you'd be up to 5, which is the standard market rate for that level of risk. Secondly, why would a low-risk business undersell themselves so drastically? If I owned a credit union with rock-solid returns, why would I let it go for the fire-sale price of just a single year's earnings, when I know the market will pay 5? Why would I leave all that money on the table? Why wouldn't I try to maximize my own investment? Wouldn't I ask for 7 years, and let you talk me down
See, shysters like you rely heavily on people not knowing stuff like this, not understanding that none of this is new - the market figured all this out decades ago. There are ratios and values and standard benchmarks for risk premiums that the market settled on decades ago, and much as you might wish you were, you are not unconstrained by them. I'm sorry to be throwing cold water on your MLM-like sales pitch.