Hey, guys. Carl Allen. I wanna do a really quick video for you today. I want to talk to you about investors and what are the two really important numbers that investors want to see when they’re looking at your deal and they’re looking at your pitch deck.

So for most deals, you’re gonna have a deal stack. So you’re gonna be paying down a little bit of equity. You’re gonna have some some bank debt probably. Could be an SBA loan or something like that.

And then you’re gonna have a little portion of seller financing. So for an equity investor to invest in your deal as your partner, there are two killer numbers that they want to see. Right? So let’s work them out.

So first of all, let’s look at the business. So we’ve got revenues of two million dollars.

We’ve got, EBITDA.

Let’s say that’s three hundred thousand dollars.

So it’s at a fifteen percent EBITDA margin, which is pretty average. Now let’s say you’re buying that business for a three times multiple.

So the asking price, the purchase price of that business is nine hundred thousand dollars. Assume for now, there’s no adjustments for working capital or liabilities or anything like that. We’re paying nine hundred thousand dollars for that business. So let’s say you’re doing an SBA deal. So you’re gonna go down to the SBA, you’re gonna do that deal. The SBA might say, well, okay, we’re gonna do a ten, eighty, ten deal structure. So ten percent has gotta be buyer’s equity, which is ninety thousand.

Ten percent is a standby seller note, so that means the seller can’t receive any payments on that money for typically two years. And then the rest of it is gonna be the SBA seven a loan program, and that’s gonna be seven hundred and twenty thousand dollars. Right? So typically now, SBA, let’s say eight percent is the interest rate.

So seven hundred and twenty thousand dollars at eight percent amortized over ten years is gonna be about a hundred and five thousand dollars per year. Okay? So with me so far. So that’s the deal structure, and you’re thinking, well, great.

I don’t have ninety thousand bucks. I need to go and get an investor to partner with me in that deal. So let’s say you approach me and say, hey, Carl. I’ve got this deal.

It’s a great deal. It’s in my buy box. I know I can scale it. I’ve got all these plans and all these things for it.

I just need ninety thousand dollars. So I might say, okay. I look at the deal. I’ll do the ninety thousand dollars, but I want fifteen percent of the business.

Right? So I want fifteen percent of the business to give you the ninety thousand dollar, equity check. And then let’s say over a period of time, let’s say it’s five years. So five years later, you’ve grown that business.

You’ve grown it to four million dollars in revenues. Right? Okay. Now as you scale a business, a lot of things give you economies of scale.

Right? So it doesn’t matter what type of business it is, your cost of goods sold will come down as a percentage of revenue because you’ll get better times with volume with your suppliers or your services, and then your overhead, conflicts. So you might stay in the same premises. You might not hire a lot more people to scale to that level.

So to go from two to four million, your profit margin is probably gonna go up from fifteen percent to as high as, say, twenty five percent, maybe higher than that. Right? So a four million dollars of revenues, now we’ve got a twenty five percent profit margin. So that business is now cranking out one million dollars of EBITDA.

Right? And although we bought it at a three times multiple, as you know, the higher the EBITDA, typically, the higher the multiple, we’re probably gonna wanna sell that business for at least a five x multiple. Right? So we sell that deal.

The asking price then is five million dollars, which is five times the one million dollars of EBITDA. But then we’re gonna have some debt still sat in the business from this SBA loan. Right? So halfway through, let’s say we still owe four hundred thousand dollars of debt.

So now we’ve got a debt free, cash free exit of four point six million dollars. Right? And then fifteen percent of that, plus fifteen percent of four point six million, I think it’s six hundred and ninety thousand dollars if my mental math, is correct. Right?

So six hundred ninety thousand dollars is the exit. So I’ve put ninety thousand dollars into this deal, fifteen percent, and then we’ve scaled it, and then we’ve both exited together, and I’ve got six hundred and ninety thousand dollars out, which means my fifteen percent of the four point six million debt free cash free valuation. Right? So now let’s do a analysis.

Right. What are the two numbers that I wanna see when you’re pitching me this deal? So the first one is I want to see the ROI, the return on investment. Right?

And that’s typically measured as something called cash on cash. So it’s the six ninety that I’m taking out of the deal when it sells divided by the ninety that I’m putting in, and that is seven point seven x. So I’m making seven point seven times my money in this deal. The second number that I want to see is something called the IRR, which stands for the internal rate of return.

You might also see that listed as CAGR, which stands for compounded annual growth rate. So I wanna see that that increase in profitability that I’m gonna make through that investment, what is that like on a compounding basis year on year? And there’s a really cool formula for that. It’s really, really simple.

You basically take the cash on cash number, which in this instance is seven point seven, and then you multiply it to the power of one divided by the number of years. And in this example, it was five years. So seven point seven to the power of one over five, which is zero point two. So the IRR on that deal, if I do my math in my head, it’s about fifty percent.

Right? It’s about fifty, fifty one percent is the IRR. I’m looking at deals all day long. I’m I’m investing in deals all day long.

I kinda know these numbers kind of off my heart now. So for me, I’m thinking, wow.

I’m gonna make fifty percent year on year on my money, which if I leave it in the bank, I might get zero point five percent. Right? So that would be an example of a killer deal, a strong green light deal for me to invest in. So let’s just recap.

We went through the deal structure. It was an SBA loan. Ninety thousand dollars was needed from the buyer. You don’t have to put that money in yourself if you don’t want to.

You could partner with an investor, someone like me. We’ll put that in. We’ll negotiate a piece of the ownership. We scale the business.

We sell debt free, cash free. My fifteen percent, then comes out to be worth six ninety. So ninety thousand went in. Six hundred ninety thousand dollars went out.

That’s a seven point seven times cash on cash return for me or a fifty percent compounded annual growth or IRR, internal rate of return over five years. Hope you found that useful, guys. Don’t forget to hit like and subscribe. And if there’s a burning question you’ve got that are not yet covered, type it in the chat.

My team will get back to me, and I’ll do a video just for you. I will see you guys soon. Until then, bye for now.