4.2 · Buying cash flow: acquisition I
Why this lesson
Section titled “Why this lesson”Buying an existing cash-flowing business is the highest-yield legal asset class most people never touch: small businesses trade at 2–3× SDE under ~$1M SDE; 3–5× EBITDA at $1–3M EBITDA, an implied unleveraged yield of 33–50%. Say the honest sentence out loud before the yield seduces you: the multiple is that low BECAUSE you are buying a part-time job plus key-person risk. The seller is the business — his relationships, his supplier terms, his 60-hour weeks priced as profit — and the multiple only stays low if he walks out the door. Nobody pays 33% yields for genuinely passive income; the market prices this asset class exactly right, and the entire craft is knowing which risks in that price you can actually fix (systems, marketing, management — your agency’s day job) versus which ones fix you.
This lesson is valuation and sourcing; 4.3 is verification; 4.4 is what you install after closing. The training method is the best free one in existence: Acquisitions Anonymous, a podcast where practitioners tear down real listings line by line, disagree with each other, and walk from most deals. That last habit is the curriculum.
The vocabulary of the asset class
Section titled “The vocabulary of the asset class”SDE — seller’s discretionary earnings (introduced in 4.1, formalized now): the business’s pre-tax profit plus the owner’s salary and benefits plus genuinely one-time or personal expenses run through the books. It answers: “if I owned this and worked it, what’s the total economic benefit?” — which is why it’s the small-business metric. EBITDA (earnings before interest, taxes, depreciation, amortization) answers a different question: “what does this produce with a market-rate manager already paid?” — the metric once a business is big enough to run without its owner. The gap between them is literally the owner’s job, priced. Value a ₱200k/month-SDE business as if SDE were EBITDA and you’ve paid twice for a salary you’ll be earning yourself.
Addbacks are where sellers lie — mostly legally. The listed SDE is net profit plus a schedule of “add these back” items: owner’s salary (legitimate), the family car and the Boracay “board meeting” (legitimate if truly personal), “one-time” repairs that recur every eighteen months (not legitimate), the son working unpaid in the warehouse (a negative addback nobody volunteers — a real cost you’ll pay in cash). Scrubbing addbacks is the first hour of every valuation: demand the schedule, challenge every line, and rebuild SDE yourself from bank-deposit reality (4.3’s job).
The multiple compresses everything qualitative: revenue quality (recurring vs project), customer concentration, owner dependence, industry tailwinds, transferability. 2× is a business that is mostly a job; 3× is a business with some system; the difference on ₱2M of SDE is ₱2M — so the diligence that moves a deal half a turn of multiple is the best-paid work per hour you will ever do.
Watch: two real teardowns
Section titled “Watch: two real teardowns”First — a boutique executive-search firm at $1.135M asking, $365k SDE, ~3× SDE. The episode title asks this module’s exact question, and the hosts work it live on the actual BizBuySell listing.
Segment: 08:41–18:45 — the listing read in full, then the revenue-quality digwatch full video
Segment: 22:21–28:18 — barriers to entry, the owner doing 60% of business development, and the deal-protection toolkitwatch full video
(Both sponsor reads — Capital Pad at ~00:46 and Acquisition Lab at ~21:40 — are cut by the segments above.)
Second — the one aimed straight at you: a digital marketing agency for sale, $4.3M asking on ~$1M SDE (~4.1×), legal-industry niche, 50% margins. One host owns a competing agency, so you get an operator’s diligence questions on your own industry. Watch the whole thing — this is the closest the course comes to a mirror.
Watch for:
- 02:49 — the read: ~$2M revenue, ~$1M SDE, 4.1× multiple, $4.3M ask. Notice your own reaction to a 4.1× against the 2–3× band — the premium is the niche focus and margins, and the hosts debate whether it’s earned.
- 04:27 — the leverage red flag: at maximum bank leverage (the US SBA’s ~90/10 program), the buyer can’t draw a salary and still cover debt service. When a deal only pencils if you work free, the price is wrong — the honest fix is more equity down, not more optimism. The PH translation is stark: there is no SBA here; bank acquisition debt is scarce, so PH deals are structured with equity + seller financing, which caps how badly you can over-lever — an accidental safety feature.
- 24:15 — AI disruption run as a live underwriting question (“is this transactable in five years?”) — asymmetric-risk framing (1.8) applied to a business instead of a bond.
- 27:40 — key-person risk, agency edition: “clients think of themselves as clients of the founder,” not the firm. You know this one from the inside — it’s also what a buyer will one day say about your agency, which makes this teardown double as a mirror for your own exit (the 06-plan’s Engine 2).
Sourcing: the funnel is the moat
Section titled “Sourcing: the funnel is the moat”The practitioner reality: ~100 deals reviewed per close. Not because ninety-nine are scams — because most are mispriced jobs, undocumented, or seller-fantasy multiples, and the discipline of walking away is what the low entry multiple pays you for. The funnel shape: 100 reviewed → ~50 worth a second look → ~10 worth an LOI-grade conversation → 1 close. Every teardown you do in this level is a funnel rep, and reps are the actual skill — the AA hosts are simply people with thousands of reps.
PH sourcing channels, in order of quality: retiring owners in your own network (the OFW-family business with no successor is the canonical PH deal), brokers and marketplaces (BusinessTrade.ph is the established broker; Facebook Marketplace and Carousell carry a long tail of listings whose documentation quality previews 4.3’s whole problem), and direct outreach to businesses you already know as a customer or supplier. The band that matters at your rung of the ladder: ₱3–8M buys ₱100k–250k/month SDE businesses at 2–3× with seller financing common.
A vocabulary note, honestly framed: the loudest voice in this space is Codie Sanchez (“Main Street Millionaire” / “boring businesses”). The course’s rating is HYPE+, reference only: her frameworks are genuinely useful names — the 7 D’s of why owners sell (divorce, death, disease, distress, dullness, departure, disagreement), the 100:50:10:1 funnel, “profit paybacks” (her branding for seller financing) — but her content is a book-and-community funnel with zero worked deals; no listing is ever read, no addback ever scrubbed on camera. Use her vocabulary to recognize what sellers and buy-side influencers are saying; use the AA pair above to learn what underwriting actually looks like. The contrast between the two is itself a 0.4-grade lesson in how this asset class is marketed.
Structuring: seller financing and its supporting cast
Section titled “Structuring: seller financing and its supporting cast”Seller financing is the PH deal’s load-bearing wall: the seller receives a down payment (10–30% down is common in the US; PH deals are relationship-priced but the shape holds) and a promissory note paid from the business’s own cash flow over 2–5 years. It solves three problems at once: it replaces the acquisition bank loan that PH banks mostly won’t write; it prices honesty — a seller who won’t carry a note on his own claimed cash flow is telling you what he thinks of his own P&L; and it keeps the seller invested in a clean transition. You saw a real one in 4.1: the $120k vending route, $60k down, $60k carried over three years.
The supporting cast, each a term you’ll now use:
- LOI (letter of intent) — the short, mostly non-binding document that states price, structure, and exclusivity period before full diligence. It buys you the right to open the books without committing to close. Everything in 4.3 happens inside an LOI’s exclusivity window.
- Working capital peg — the agreed “normal” level of inventory + receivables − payables that must be in the business at closing. Without it, a seller quietly collects his receivables, runs down inventory, and hands you a business that needs ₱1M of immediate cash to restart — a price increase wearing an accounting costume.
- Earnout — part of the price paid only if the business hits agreed targets post-close. The honest use: bridging a genuine disagreement about the future (the seller believes the new contract will renew; you don’t). The dishonest use: sellers’ brokers papering over unverifiable claims. Earnouts also create disputes — define the metric, who controls the decisions that drive it, and the measurement dates, or skip it.
- The recruiting teardown’s toolkit — non-compete, non-solicit, retention bonuses for key staff — is how identified key-person risk becomes contract language rather than a prayer.
The Dhandho overlay
Section titled “The Dhandho overlay”Mohnish Pabrai’s frame, which this level adopts wholesale: “Heads I win; tails I don’t lose much.” The Patel motel playbook — buy an existing, boring, cash-flowing asset at a low multiple, with financing structured so the downside is survivable, in a business whose operations you can personally out-execute — is exactly the PH small-business acquisition at 2–3× SDE with seller financing. Low risk is not low uncertainty: the future of a ₱150k/month laundry chain is genuinely uncertain, but at 2.5× SDE with 25% down and a seller note, most futures repay you. Buy asymmetry, not stories — the 1.8 lesson, now with employees.
Your first two funnel reps — analysis only:
- Pull two real PH listings (BusinessTrade.ph or a marketplace) with stated price and claimed monthly profit. For each, compute the implied multiple on claimed SDE. Most PH listings quote “monthly income” — annualize it and ask the first scrubbing question: is that revenue, net profit, or owner-optimism?
- Scrub on paper: list every addback you’d demand evidence for, every negative addback you suspect (unpaid family labor, below-market site rent from a relative that ends at sale), and rebuild an honest SDE range (pessimistic / claimed / defensible).
- Run the AA questions: What % of revenue depends personally on the owner? What’s the revenue quality (recurring, repeat, walk-in)? Who are the top three customers and what happens if one leaves? What kills this business in five years (the AI question, localized)?
- Structure it: write the one-paragraph deal you’d offer — price at your defensible SDE × your multiple, % down, seller-note terms, working capital peg, and which key-person protections you’d require. Then write the Dhandho sentence: “Tails, I lose at most ₱__.”
- Verdict, funnel-style: pass/pursue. If both are passes — that’s the expected outcome and the correct rep. Two reviewed, ninety-eight to go.
Check yourself
Small businesses trade at 2–3× SDE (a 33–50% implied yield) because:
SDE differs from EBITDA in that SDE:
The retained-vs-contingent analysis in the recruiting teardown demonstrates:
In the agency teardown, the buyer at maximum leverage couldn't draw a salary. The honest conclusion:
Seller financing 'prices honesty' because:
The working capital peg exists to prevent:
The course rates Codie Sanchez HYPE+ / vocabulary-only because:
The 100-reviews-per-close funnel implies the core skill of this asset class is:
You can move on when… two real PH listings are torn down in writing with implied multiples on scrubbed (not claimed) SDE, the AA question set answered for each, one paper deal structured with seller-note terms and a peg, and the Dhandho downside sentence filled in with a peso figure.
Go deeper
Section titled “Go deeper”The Acquisitions Anonymous back catalog is the free rep machine — one teardown per week keeps the funnel muscle warm.
Next: 4.3 · PH due diligence: acquisition II — the deal survived valuation; now verify it exists. BIR open cases, unpaid 13th months, and why in the Philippines you buy the assets, not the corporation.