Buy a $500K/Year Income Stream? This Is How to Do It

0:00What if today you could buy a$500 ,000 per year income stream? You could replace your salary. You could become the boss immediately. And you could reach financial freedom faster. You're probably thinking to yourself right now, Dave, that sounds impossible. But today's guest proves that the average American, yeah, even you hearing this right now can get in on the action. It is not a gimmick. It is not a scheme. It's actually kind of boring. and it's transparent. And it's something I'm actually considering doing myself very soon. It's buying a small business. If you own or want to own rental properties, our industry is actually kind of similar to buying small businesses.

0:44In our industry, you buy a property, you get it rented, you run it well, profit and repeat, similar with small businesses. But these small businesses are sort of like rental properties on steroids, at least in terms of how much cashflow they can generate. And just like rentals, you don't actually need to put in all the cash up front to buy them. Buying just one of these businesses could actually replace your salary. And today, we're showing you exactly how to do it.

1:15What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. Today, we're talking about buying small businesses with Will Smith, host of the Acquiring Minds podcast. Of course, you're probably thinking, and it's true, this is a real estate podcast. I myself am a real estate investor. But buying small businesses has emerged as a popular alternative, or I would argue as a popular complement to real estate investing in recent years. So I wanted to have this conversation with Will and share it with all of you. Let's bring him on. Will, thanks for joining the BiggerPockets podcast.

1:52We're excited to have you here. Dave, thrilled to be here. know the podcast, have known it for years. So it's really exciting for me. Well, let's just start by hearing a little bit about your background and how you first got into the world of investing, personal finance, wealth building, all that. So I've pretty much for my whole career been an entrepreneur of some kind, mostly doing my own businesses for the first few chapters of my career. And then my most recent and probably final W-2, I was living in the Bay Area and working for a couple of startups, but had that entrepreneurial itch that just never seems to go away with me, but didn't at that time have a business idea that I wanted to run after.

2:39So I had the energy, but not the idea. And that was when I discovered the possibility of buying an existing business, which is what we're here to talk about. And I can kind of give the origin story of acquiring minds in a minute. But I guess to answer your question directly, have always been entrepreneurial, have always been interested in ways to build businesses and as a consequence of that, build wealth. So, Will, tell us, what is ETA? ETA, Entrepreneurship Through Acquisition, also known sometimes as search or search funds you might've heard of, is the idea of becoming an entrepreneur or business owner by buying an existing business, as opposed to starting one from scratch.

3:27There is a lot of excitement around this path in the last 20, but especially in the last five years. Business schools are teaching this. A lot of people are coming from tech or finance and wanting to get out of those industries and become entrepreneurs, and this is a path to do it. There are demographic trends of a lot of retiring 60 and 70-somethings whose businesses need new ownership. So there's a lot of trends that are contributing to this, not to mention the model itself is really compelling. So you can buy a small business with leverage, with an SBA loan in the U.S., but there are also ways to do it with leverage in other markets, non-U.S.

4:10markets. So you don't have to stroke a check and buy the entire thing. Like in real estate, you have a down payment of 10%, 20 % and can buy a multimillion dollar business. And even for that 10 % or 20%, you can raise investor equity to help you get there. So the economics are really compelling as well as a number of other trends that are sort of converging to make this a really exciting path. And then people like me and many other podcasts talking about it all the time. So raising the awareness of it as well. What made you feel like you could do it, Will? Because I wanted to be entrepreneurial too, and I was first out of college trying to figure it out.

4:48It never crossed my mind that I could buy a business. And I think a lot of people feel that way about real estate too. They don't realize that there are ways to get into real estate that don't require as much money as you might think. My assumption was that small business was the same way. So were you coming from a place where you had a lot of cash or like what made you feel like you could do this? Because it, to me at least, it feels daunting. I didn't have a lot of cash. I didn't have no cash with the SBA loan possibility. Essentially 10 % of a business's enterprise value or total project cost, as they call it, is roughly what you'd need to bring.

5:31And for certain size businesses that would be interesting enough to pursue, I could afford that. And then I also learned that you can, even for that 10%, that equity, if you have a good deal and you know there are people in the ecosystem, investors in the ecosystem, usually individuals who will help you with that or will invest in your project. So I saw pretty early on that there was a way to make this work for myself. Now, it was unlikely to be a very large business. I wasn't going to be acquiring a$20 million business, but certainly something interesting enough, like as I said, to pursue. What is it that attracted you?

6:10Like you said, you didn't have an idea, but there are other ways to be an entrepreneur, real estate being an example. What made you so enthusiastic about this? I had spent a lot of time at that time of my life, and frankly, really my whole career, are kind of ideating what it, what is a new thing that the world needs and spending time in communities that where they spend a lot, you know, there's like the indie hackers world. This is kind of a, another niche of entrepreneurship where primarily tech oriented people are trying to come up with the next SAS idea. And I had done a lot of that and spent a lot of energy doing that.

6:56And I, and I, um, I don't think that having a completely novel or a novel idea at all is that important to me. I just want to be building a business. And I, and I think I had, I had gotten, um, too caught up in coming up with some new thing. You don't need to do that. And I, and I don't, I don't even think that that's like a bad thing or like I had, or I was giving up on coming up with a new idea. In fact, the more I really thought deeply about this and really connected with people about this, the idea that you would launch something brand new is not even very wise. Like many of the most successful businesses, the market demand has already been demonstrated.

7:39So go where there are existing businesses that have already proven that there's demand there for whatever the product or service is. So this was a path to entrepreneurship that got around that thing that was a big sticking point for me. The sense of possibility was completely wider than actually coming up with a brand new idea on my own. I mean, that resonates with me, making me think. So before I started working at Bigger Pockets, a couple of careers ago, I had started a tech company as well. And I went to this mentor to get some information. And I asked him to sign an NDA. And he was like, I'm not going to sign an NDA.

8:21And I was like, why? I got to protect my idea. And he was like, if I could do your business better than you, then you don't have a good business. Ideas are stupid. Execution is the only thing that matters. And I remember just being so dejected by that, just being like, I thought I had this amazing idea. And he was like, I don't care at all about what your idea is. All that matters is like, can you run a business successfully? And it definitely changed my perspective. And it is something, you know, I've personally grown an interest in ETA myself. And it's something I think about a lot, not having to focus on reinventing the wheel, you know, inventing something new.

9:03That's the same thing I love about real estate, right? It's like, it's a business model that's proven. I don't have to think about that. I just have to think about things that are in my control, how to execute and operate. Just in case anybody's hearing this and thinks, well, the creativity aspect of entrepreneurship, I guess that's not what ETA is about because we keep talking about how it's not doing your own idea or a new idea. And I just don't want people to leave with that impression because sure, the thing, the product or service that's being sold may not be novel. But within a business, it's an animal.

9:37It's its own ecosystem. And there's just constant opportunities for creativity and imagination within a business or within an industry that already exists that you get into. So I love creativity and I still see business absolutely as an outlet for that. So I just don't want people to think that we've foreclosed the opportunity to be creative by going down this path. Not at all. So, Will, you clearly became interested in this. What happened next? You go out and buy your first business? So I love at first sight and I decide, okay, this is the way, this is the path I'm going to pursue. My own entrepreneurial track record had been in building niche media, what I call authority media.

10:22And so as I looked around this space, the ETA space, it didn't seem like there was what I like to call the authoritative voice of ETA. this path that was so exciting to me, this niche of entrepreneurship that was, clearly, if I was having this reaction, other people were going to be similarly interested in doing this. And I already saw that people were doing it. As I said, business schools were teaching it. People were doing this. So I thought I could build some sort of media something here, try to become the authoritative voice of this space, because I'm going to be studying it on my own anyway, trying to meet people, get stories, understand their learnings.

11:02I'm going to be going through all those motions anyway. Why not capture that into some sort of media something? Interesting. And maybe that becomes something. Maybe that becomes something or it doesn't, but I probably will have raised my own profile in the space. Maybe that will help me buy a business better or raise investor capital or whatever. So I didn't see that that could hurt. I saw that it could only help and maybe even become its own business. And ultimately the media format, I ended on, decided on was a podcast. And so I thought I'm going to go heads down on this podcast for a year and then evaluate.

11:41And happily over the course of that year, year and a half, it really grew. And there was a lot of market feedback that people were listening, that sponsors were interested. I was loving it. I mean, I was just, and to this day, I love it. So it was just having come off of this period of my life where I'd been looking for some idea to launch into the world and how challenging that was. All of a sudden, I had launched an idea into the world and the world was reacting positively. So I said, this deserves all of my attention. And probably around episode, I think it was episode 200, I said to myself and publicly, I was like, I no longer am even going to consider myself what we call a searcher, somebody who's out there trying to buy a business.

12:26I'm going full-time, 110 % on Acquiring Minds. and I'm just going to have to live with the tension that I'm the guy who talks about this all day long, but never actually does it. And it's been okay. Nobody cares. It's so funny. I'm sure the irony is not lost on you that you wanted to get into search because you didn't have an idea for a business, but just the idea of search gave you an idea for a business that you went out and started and didn't actually wind up completing your search. Pretty funny, but good for you. It's awesome that you've built this business. So Will, I want to talk to you about the basics.

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16:32Welcome back to the BiggerPockets podcast. I'm here with Will Smith talking about ETA or entrepreneurship through acquisition. It's the idea of going out and buying a small business and using it to pursue financial freedom much in the way that you can through real estate investing. So Will, maybe give us some of the basics. What does it actually mean to go out and buy a business? And maybe tell us a little bit of the steps that someone needs to take. Sure. And let me just say, Dave, because I heard you mention the returns. And that is something that draws a lot of people here, especially if they come from sort of an investor-first mentality.

17:10We speak in multiples in small business land, multiples on earnings as opposed to cap rates like you do in real estate. And the multiples here are, at first glance, very low. Call it 3 or 4x. So if you buy a business that's generating$750 ,000 of earnings, let's call it, that might sell for$2 ,250 ,000. Okay. Well, that's incredible. That's a 25 % to 33 % return on unlevered cash. And let's not forget we're using leverage in these. We're using SBA debt or conventional debt to buy these. Will, can I just explain that to our audience just quickly? So in real estate, like if you were to go out and buy a commercial multifamily property, I'm going to use round numbers at a 5 % cap rate.

17:59That's essentially meaning you are paying 20 times the net operating income for that business. So for every dollar of income, NOI, you're paying$20. With the businesses Will is talking about, for every dollar of income, you might be paying $4. You might be paying$5. You might be paying$3 actually on some of these deals. So the value that you get for every dollar that you invest in it in terms of cash flow that you can generate is really high. The efficiency that you can generate cash in these businesses is really exceptional. Like, I don't know any other way to do that. Will, do you? No. And it is exceptional.

18:40Now, caveat, caveat, caveat. Right? It's hard. It's hard unless you really know what you're doing. I just kind of have a blanket policy that you should expect, you listener entrepreneur, that you're going to get in and run this business. This is going to become your job, your career. So unlike real estate, where you can start building a portfolio on the side, it's a lot of work, but it's passive, semi-passive. This is the absolute polar opposite of that. This is highly active. And not only is it active 40, 50, 60 hours a week, it's also really hard. What this looks like is you're buying a business from probably a retiring boomer of an HVAC business who himself was an HVAC technician, came up through the trade, built a crew around himself, then another crew, then another crew.

19:31And by the time he was 70, he had a business doing, you know,$4 million a year and$750 ,000 of earnings. All of his people know him as the leader. He is the business. It's held together with, you know, through his willpower and the respect of his technicians because he knows what he's doing. And then you come, you know, 20 and 30 years younger, not ever having turned a wrench and saying, hey, guys, I'm your new boss and owner of this business. Okay. So the dynamics are interesting and delicate. And that's what we talk about on the podcast on Acquiring Minds is all of this, all of these stories and how people do this and pull this off.

20:11and there's pitfalls everywhere and risk everywhere. Now, I feel like I'm being just negative. I always put that out there first because this path can be oversold. No, that's super helpful. Yeah, because you hear these amazing returns and you're like, oh, and I see this too on the internet. People are like, oh, it's passive. But you're saying the opposite. It is not. Like this is hard and it's difficult. But so then how do you succeed? Like who is the right person to go out and buy a business? You need to be drawn to this path by much, much more than the returns. You need to want to live the life of a small business owner, at least for a few years.

20:50Now, I'm not saying you have to run the small business that you buy as the owner operator from now until you retire. But there are a lot of people who try to accelerate through that part too quickly, and it's extremely dangerous. You need to know that you're signing up to be a small business owner for a number of years. and all of that entails. And we can have a, and I'm happy to go more into that, but I think I just started to paint a picture. It's a very particular lifestyle and a very particular path. So first things first, you gotta be willing and more than willing, you gotta be excited to do that because it's gonna try you.

21:24It's really hard. But if you're excited by that or like the prospect of that, then this is a very exciting opportunity because, I mean, you got into the business as an acquirer. So you've built this skill of business acquisition, which many boomers don't have because they built the business from scratch. So you have this whole other skill set of being able to buy businesses so you can start buying others locally or in adjacent services. There's going back to that sense of possibility that ETA gave me. There's a lot of ways you can take this. And by the way, now you're in a business. You're in your boring business.

22:03And if you bought big enough, and if you've improved it, there could be real cash flow coming off of it from which you can then buy other businesses. And so what this looks like after some number of years, and you're becoming more advanced and more sophisticated, is you are less and less in the business. You're working more on the business. You have more cash flow coming out of it. You have deeper relationships with lenders, local or otherwise. They've seen you as an operator start to trust you. If you can get the business to a certain size, you have that much more debt that becomes available to you.

22:38And you can really start to build something big. I mean, I've had a number of people on the podcast who have built businesses well, well into the eight figures of revenue, $50 million businesses and beyond. Wow. So the potential here is really uncapped. So I've been listening to your show a lot. And one of the things I've learned that's struck me is that it's honestly kind of similar to many of the scaling and career paths that people take in real estate. It's obviously different risk reward profile, different business thing. But what I've seen is that some people become cash flow investors, right?

23:15They buy a business and they want it to be a lifestyle business where they work on it a lot in the first couple of years. But then over time, they can step away from it a little bit and have it be a lifestyle business. That's what a lot of people do in real estate. That's kind of the path I've tried to follow over the last 15 years as a real estate investor. There are other people who do what we would call something like a BRRR or value-add investing in entrepreneurship through acquisition, whereas you buy something and you improve it, right? Maybe you do that through sales, but there's also ways to do that through systems and efficiency and operations, something similar you do in real estate.

23:50There are even people who essentially flip these businesses, right? You go in, you try and implement new management and new skills and grow them and then you sell them to private equity. And so that's what I think is so cool about it is that there are a lot of different approaches, different strategies to acquiring these businesses and operating them that can align to your lifestyle goals, provided that you're willing to put those years in and that effort into it. Yes, there's all different types of models here. I gave you these outsized examples of people building$50 million revenue businesses.

24:24But yeah, you could also buy a business that throws off half a million dollars a year and it pays you half a million dollars a year. And you've got a general manager. I'm not going to say it's going to be passive, but you've got a guy who's making the trains run on time, as we say. And you can have a more semi-passive or less intense relationship to that business and be earning, taking home, half a million dollars a year. And by the way, this real estate people will, of course, resonate with this. you've got debt on the business and the business is paying down that debt. The SBA loans are 10-year amortization loans.

24:59So after 10 years, you've bought the business for 10 % cash. And then after those 10 years, you've paid down that loan. So the entire equity value of the business, you've also been generating over those 10 years. And then you have an asset. I don't like to use that word in business buying land, but people do. Then you've got an asset that is worth whatever you paid for it, plus inflation, plus appreciation, plus growth that hopefully you've generated over those last 10 years, all the while having made$500 ,000 a year for your take. Yeah, exactly. It is pretty, that is amazing. Can you give us some examples of businesses that people buy or maybe some industries that you have seen work on the podcast?

25:44There are certain categories that are really popular where you see a lot of acquisitions occur. HVAC or home services broadly is one of them. That's been a very popular space, both at the private equity level, but also the individual entrepreneur buying a business level. That's why I keep coming back to HVAC or plumbing. Landscaping is another one. And you see a lot of those stories because there are a lot of those businesses in every market. There are some dozen of those businesses. And while the trade and the technicians is complicated and you are unlikely to learn how to become a plumber. The business motion itself is relatively easy to understand.