Your resume , not your checkbook, should determine what size business you can own and operate. A case study approach will explain how to buy a much bigger company than you can finance on your own.

You've been very successful managing a company or division with full P&L responsibility and produced millions of dollars of profits. You've been well compensated and put some capital together. You're intrigued with the idea of becoming a business owner. You like the idea of being captain of your own ship and also want to create wealth for yourself and your family.

What kind and size of business should you buy? The best answer may be; the same size business you've been running for others. If you've been running a $200 Million dollar division, operating a very small company, may not be what you can do best or enjoy the most. But is it possible to buy a $200 Million dollar business when you've got a million dollars or less of your own to invest?

Very often, you can. Professional investors are very enthusiastic about backing a CEO with the right industry experience; especially if you're prepared to invest your own capital along with theirs. Furthermore the ownership that they'll allow you to earn by operating the business profitably will typically be much greater than the equity which you buy at the outset.

Let's consider an example. Carol is a division VP of a large manufacturing company. She has been involved in her industry for over 15 years. The division which she operates generates revenues of $230 million and contributes $30 million to the pre-tax profits of the corporation. Carol has built a war chest of $800,000 with which she would like to make an acquisition.

Through her industry network , Carol learns that the owner of one another company in the same industry, Valence Inc, is planning to retire and wants to sell the business. She knows the company and is confident that she could operate and grow it successfully. Valence has revenues of $165 million and pre-tax profit of $12 million. She believes that at the helm of Valence, she could increase both revenue and profit margins.

Carol contacts the owner of Valence, Doug Miller and learns that he has no heirs in the business. While the current management team is willing to stay on, Doug doesn't believe that any of them is ready to run the business. Doug has hired an investment banking firm who is preparing to put Valence on the market.

Carol remembers attending a seminar put on by Capital Results which specializes in working with entrepreneurial business buyers. After some initial meetings , Carol hires Capital Results to help her acquire the company. Capital Results will locate the investors and will also negotiate on Carol's behalf to maximize her opportunity in the deal.

Capital Results introduces Carol to several PE groups which have the potential to match up with Carol's interest. Carol is surprised to learn that there are hundreds of funds with a combined investment capacity measured in hundreds of billions of dollars. CR chooses a few funds whose interests correspond with Carol and the Valence deal based on industry, geography, deal size and several other considerations. Carol feels very comfortable with RMW Capital Partners. RMW understands the industry and Carol likes their approach. RMW appears enthusiastic about Carol's experience and her plan for Valence. Carol and RMW notify Doug's investment banker that they want to look at the company.

Valence's performance has been reasonably steady for the last few years. EBITDA for the previous year was $15 Million. Carol and Valence know that companies like Valence have been selling lately for five times EBITDA. They expect the other bidders to come in at around $75 MM. Carol is very confident that she can quickly improve Valence's profitability by $2MM by removing some inefficiencies. She is also confident that she can grow the business by at least 8% each year. Based on these projections, the partners at RMW are confident that they can afford to bid $80MM. This becomes the winning bid.

Carol and her new partners have extensively modeled the projected future performance. Based on their calculations, they want to borrow 60% of the purchase price and invest 40% as equity capital. Therefore, the equity required for the acquisition is $32MM. Carol's $800K represents 2.5%. The remainder is purchased by RMW. $40MM in debt financing will be provided by Junior and Senior lenders. Mr. Miller is taking a note for $8MM. The debt will be paid off using the profits of the company over a four year period.

RMW sets up an option pool whereby Carol and certain key managers can acquire up to 15% of the equity in the company at the same price being paid to Mr. Miller. Carol as CEO will get 60% of these options. Carol gets a salary and bonus package which is about 95% of what she was making in her old job. She is willing to defer some income in order to create wealth down the road.

Carol and her team make their numbers. They improve profit margins and grow the company by 8% per year. EBITDA was 9% of profits during Mr. Miller's last year. Carol improves this margin to 12%. There are enough profits to pay off all the debt in four years , so at the end of that period, the company is effectively debt free. At the end of 5 years, EBITDA is 29 million on sales of $242 million