Personally Buying a Small Business - Quitting the Rat Race

Hey Monkeys,

Anyone here have experience personally buying a small business (less than a few million in revenue, business broker territory) from somewhere like microacquire, bizbuysell, loopnet, through a broker etc.? 

If so, would you be willing to share your experiences and process?

Comments (90)

  • Associate 2 in Consulting
Aug 19, 2022 - 1:00pm

You can viably do this, but in the early years (assuming you even hit scale) get ready to take a massive pay cut and roll up your sleeves and do a lot of the dirty work even as a manager (shit always happens and guess who must deal with it?).

Aug 19, 2022 - 1:05pm
AttackSnail, what's your opinion? Comment below:

I'm really more referring to an established regional business that's not really needing too much growth or 'hitting scale'. Just buying a successful small business from a retiree with established processes and customers in place, like a regional trucking business, dumpster rolloffs, etc. Large number of businesses out there doing <$10mm in revenue that produce a few hundred thousand or even $1m+ in owner's earnings so not really worried about a pay cut, even with debt service. 

A friend of mine's father owns a small trucking business, is entirely absentee (pays his President ~$400k/year to run it) and he personally takes home over $1m+/year. It is much much more common than one might think 

Aug 23, 2022 - 5:14pm
marketMergerMaddie, what's your opinion? Comment below:

My father ran a business this way (totally absentee, didn't even visit the site of his business for over 2 years) and profited, but not massively. He worked another job that paid WAY more full time and saw this business as a way to get just a little extra cash but nothing crazy whatsoever. I think that this is far more doable in a lot of businesses than people might think, but I think people overestimate how much they are able to make this way. 

If my father ran that business as his main business, I'm certain he would've made a lot more money from it. But even he knew his day job made him so much more than this side business ever could

Aug 19, 2022 - 3:50pm
throwawaybadabing, what's your opinion? Comment below:

Massive adverse selection bias. Needs to be sourced through friends & family. Either that or start something on the side (e.g. Dunkin franchise, ServPro, things like that)

Aug 19, 2022 - 4:45pm
Credit Swish, what's your opinion? Comment below:

What about building a relationship with a few business brokers in your target market and just passively vetting dozens of opportunities over the course of a few years until you find the right one? Seems like that's what most search funders do. That's not really impossible but I guess that's beyond the effort most are willing to put in. I seriously doubt this "Needs to be sourced through friends & family". If that was the case then no 'outsider' would ever acquire a business which is just simply untrue. 

Aug 19, 2022 - 4:49pm
AttackSnail, what's your opinion? Comment below:

True but most acquirers/operators of small businesses don't have anywhere near the business acumen of even your average high finance/consulting professional. Also franchises are generally horrible businesses and far from absentee enough to work on the side which tells me you might not know as much as you think about the SMB space.  

The amount of times I've seen SMB guys think cash flow=revenue, still use fax machines instead of CRM and email, pay themselves salaries to the detriment of the company, price their businesses based on the amount of money they need to retire as opposed to valuations based on tangible business metrics, and a massive host of other oddities proves otherwise. Most small/local business owners are not sophisticated with regards to what may appear to users of this site as basic knowledge and processes. 

Edit: salty people, why are you booing me? I'm right. Is it not the expectation that IB/PE/CO folks have a higher overall business acumen? If they didn't then they shouldn't be in those jobs. Why would someone want advisory from someone less competent? What's all this training, education, certifications, deal experience and long weeks for? 

Aug 19, 2022 - 6:09pm
throwawaybadabing, what's your opinion? Comment below:

Franchises - the right ones - can be very profitable businesses, and importantly - much easier to scale. It takes business model risk out of the equation. 

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Most Helpful
Aug 19, 2022 - 6:36pm
AttackSnail, what's your opinion? Comment below:

I have worked on multiple large franchise deals for PE firms in the food&bev space and personally evaluated several hundred individual franchise locations. Franchise only truly work at scale (30+ locations) in a sufficiently diversified geographic portfolio. Otherwise your profitability is subject to traffic patterns, and your expenses (royalty, forced marketing expenses, etc.) are all done as a minimum % of revenue. Road construction causing cars to go another direction for a few weeks? Boom profits gone. Your franchisor does not care if you make money or not as long as you fulfill your obligations to them. They will not assist you if you're in financial trouble. You're strapped for cash but McDonalds decides they want you to remodel the entire interior? Too bad do it anyways on your dime or face penalties. Many franchises will allow another franchisee to cannibalize your territory, they don't care. Franchise is mostly low margins, especially food. You're also told how to run your business, often times down to the smallest detail. Your marketing money doesn't even go towards advertising your specific location, it goes to advertising the brand. You offer nothing at your Wendy's that the Wendy's 2 miles down the road doesn't have. There is no differentiation. Its essentially a strictly regulated commodity. Your brand territory reps watch your every move and bring down the hammer in an instant. Don't like it and want to get out and sell your business? That'll cost a fee and they get to decide who you can and can't sell to. You're also subject to one of the lowest skilled and more highly volatile labor markets with record turnover as of late. Your franchisor decides who you can buy your materials and equipment from (hint: it's always them and only them). There is next to no room for optimizing your business in a prudent manner. It is the absolute worst business to be in. There's a reason they're mostly run by immigrants who bought in 20+ years ago. It's essentially buying yourself a job, and if you're lucky you can acquire a few after years in the game and then finally maayyybe make low hundred thousands. Lastly, patrons of a franchise business are not the type of people you want as clientele. It's a business for non-business people. Basically no room for true value add. 

  • Analyst 2 in IB-M&A
Aug 19, 2022 - 5:16pm

Ignore my title, I do buyside work right now where we look at businesses like that all day. There'a 100s of them out there and it's what I eventually want to do myself as well. Owner wants to retire, money is good and revenue is somewhat stable. I would try to build relationships with business brokers (that's how we usually get them). Also there's a podcast called "Think Like an Owner" that I like to listen to.

edit: last episode is actually with a business broker and he talks about he to be a "good buyer" for them.

Aug 19, 2022 - 6:45pm
AttackSnail, what's your opinion? Comment below:

Thanks. Pretty much sums up what I'm looking for. Characteristics of an LBO candidate (ideally a B2B business) but on a much smaller scale, too small for a fund to waste their time with. Thanks for the recommendation I'll check it out. What sort of characteristics have you noticed that separate a good small business from a bad one that might not be readily apparent? What sort of issues have you run into?

Aug 20, 2022 - 2:41am
2rigged2fail, what's your opinion? Comment below:

I'm saving capital to do this currently. Although I may not even need to use my own cash, it is best to have an escape hatch if needed. you should 100% read Harvard business review - Guide to buying small businesses, takes you through the process of running your own search fund right up to execution, with real world examples. theres also a tiny YouTube channel called "acquisitions anonymous" who go through potential buys from brokers weekly, sometimes they have sector specialist guests on, they'll run an hour video/podcast on buying, for example, a Veterinarian and look at the potential for roll-ups etc, props to them for grinding despite the low viewership. 

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Aug 20, 2022 - 10:05am
2rigged2fail, what's your opinion? Comment below:


AttackSnail -

https://www.wallstreetoasis.com/forum/other/my-story-the-sequel-to-the-owning-unsexy-businesses-thread

  • 1
Aug 21, 2022 - 11:44am
AttackSnail, what's your opinion? Comment below:

Thanks, I'll definitely check out the HBR article and the link you posted. Glad you brought up Acquisitions Anonymous, I have listened to almost every single one of their podcasts. Great guys who really help with understanding the holistic picture outside of the often cloudy SMB financials 

  • Associate 1 in PE - LBOs
Aug 21, 2022 - 1:20pm

Not trying to dissuade you but I feel like Twitter personalities and stories out there make it seem way easier than is. Everyone's solution seems to be find a business using outdated processes (e.g., pen and paper to track things) and slap a CRM in there, update the website and augment revenue with complementary offerings. All great and worthwhile but if it was that easy, we're all idiots for not pursuing it. The other thing is finding an interesting business in the right geography you want to be in for the right price. It's a tall order.

Check out a podcast called Acquiring Minds with Will Smith. All he does is interview people who have bought small businesses ranging from IB/PE expats to school teachers that have done it, also for businesses of all sizes (as small as $150K SDE all the way up to true multimillion EBITDA businesses).

Aug 24, 2022 - 12:17pm
AttackSnail, what's your opinion? Comment below:

You definitely have to kiss a lot of frogs.

Twitter is one of the worst places for fake evangelists telling you how easy it is. They often times skip over some of the nuances that can materially affect reality. Twitter is also a wonderful place if you follow the right people who genuinely do deep dives. 

A huge hurdle is just going through the diligence process and dealing with the brokers.

It seems like business brokers are the used car salesman of the finance world. I've also never met a business broker who has had the capability to provide transparent and articulate materials on behalf of the seller in the way that a sell-side M&A banker would. Is this the norm? Is this not part of their job? Seems like most SMB owners need handholding through the deal process, and if not the brokers, then who is helping them?

Aug 25, 2022 - 11:06am
dinganddong15, what's your opinion? Comment below:

I think one thing to note is most of these businesses likely do not have great accounting methods and may not even have an outside auditor which makes DD so much harder. 

 

Aug 21, 2022 - 1:30pm
m_1, what's your opinion? Comment below:

Running small businesses with sub-$2M in EBITDA sucks. Really sub-$3m is pretty bad...

There's no management layer and the only team you can afford will not be very bright, which is a depressing work environment if you're coming from IB/PE.

Also, a lot of the idiots on Twitter buy unscalable, unfundable shit.

If you want to make $$$, at least pick a business that can feasibly grow ~2x+ a year. Make sure you can raise capital for it too. Doesn't need to be sexy, but it can't be something unfundable.

This way you can sell secondary later on and make $$$ even if you dont hit a true liquidity event.

I actually think most PE/IB kids wanting to do this should just invest $100k total split into four 25k checks into SMEs doing ~$2m - $10m a year. Then focus on adding value where your existing skill set allows you to. Keeps you out of the sweaty BS with some nice upside.

  • Associate 1 in PE - LBOs
Aug 21, 2022 - 1:59pm

"I actually think most PE/IB kids wanting to do this should just invest $100k total split into four 25k checks into SMEs doing ~$2m - $10m a year. Then focus on adding value where your existing skill set allows you to."

School me here. What business doing $2-10mm a year would even need my $25k or want my skill set (which feels useless to a business of that size given they're likely not rolling stuff up)? What exactly what would I be doing for them in exchange for having a window to invest my $25k?

Aug 22, 2022 - 12:25pm
m_1, what's your opinion? Comment below:

"I actually think most PE/IB kids wanting to do this should just invest $100k total split into four 25k checks into SMEs doing ~$2m - $10m a year. Then focus on adding value where your existing skill set allows you to."

School me here. What business doing $2-10mm a year would even need my $25k or want my skill set (which feels useless to a business of that size given they're likely not rolling stuff up)? What exactly what would I be doing for them in exchange for having a window to invest my $25k?

You would help with things like implementing a 13w model to unlock cash within the business.

Optimizing the credit stack.

...or other areas where you can add value? Presumably if you think you're qualified to buy a business, then you are able to add value in some way? 

They take the capital at a good price b/c you are able to add so much value. You can even tie it to milestones or something similar. This is how we bought up a good amount of positions below market. Bigger cheques but same idea.

If I was a PE/IB kid I would structure the value add around:

-CFO-type activities

-BI/analysis. IE identifying incremental marketing spend, building out better LTV/CAC models to see how far spend can be pushed, etc.

-Helping management triage by what drives the largest gain in EV. Most management at companies doing under $50m have no idea what the big drivers are for EV in their business.

  • Analyst 3+ in IB-M&A
Aug 22, 2022 - 8:42am

Not OP but interested in your story. How did you find/source the deal? What type of business/how big? How did you go about financing? Was it in your geographical area or were you more traveling back and forth? What was your background? If it was a smaller business what type of company did you use to do a QofE and Tech DD? Costs for the DD process? 

Anything else you found surprising or interesting or weren't expecting?

Thanks in advance!

Aug 22, 2022 - 12:57pm
2rigged2fail, what's your opinion? Comment below:

did you offer to hire him as a consultant? he'd of been involved a 3-6month mgmt transition anyway right?

  • Principal in PE - LBOs
Aug 22, 2022 - 1:52pm
throw-away-22

I attempted to do this. Went all the way through qofe, tech analysis, and drafting APA but week before closing, seller pulled out and decided didn't want to sell. He was afraid of not having anything to do in retirement. What can I answer for you?

how much were your out of pocket DD expenses? ouch

Aug 22, 2022 - 9:23am
Jstef, what's your opinion? Comment below:

There are a lot of opportunities in this space because many wealthy small business owners sent their kids to med/law school and they have no succession plan. My family members have been gobbling up convenience stores/liquor stores/pizzerias, just a co-investor but I know the business (worked in them when I was a kid). Printed money during covid because of all the drinking.

Aug 22, 2022 - 1:41pm
wsa007, what's your opinion? Comment below:

I suspect this is what will happen to a lot of our clients in the convenience/liquor store/gas station industry when they finally decide to retire since none of them really raised kids who are capable to taking over their business (or running any business for that matter).

What are you family members doing with these businesses?

Aug 22, 2022 - 4:39pm
Jstef, what's your opinion? Comment below:

We have willing operators (immigrants from our community), we will buy and then do lease back or seller financing. Some of the businesses are being sold at RE value, so we will re-develop the property if it is viable (ie, change a store into strip mall then lease out to franchises). Some of the liquor stores we have just print money, literal gold mines we're holding onto and still manage. Others have opportunity for add-ons like hot food service, car wash, etc. 

Aug 23, 2022 - 2:59pm
takenotes08, what's your opinion? Comment below:

Ive bought 14 small businesses over the past 3 years and consolidated them.

Buying a small business while you have a job sounds cool in theory but in practice I doubt it ever works out. If you're a finance professional focus on being a finance professional, if you want to be an entrepreneur be an entrepreneur. If you try and do both at the same time you are most likely going to suck at both. 

Aug 23, 2022 - 3:44pm
2rigged2fail, what's your opinion? Comment below:

watched this yesterday, the guy was basically full time looking to acquire but was also working as an independent consultant-

https://www.youtube.com/watch?v=x2-SxrZedQc&lc=UgxOBeynyegTjrKCl0x4AaABAg

Aug 24, 2022 - 11:50am
AttackSnail, what's your opinion? Comment below:

Currently under NDA for a deal and the seller is blatantly unwilling to provide certain materials (tax returns, financials, and other docs). Huge red flag. Do these SMB guys really think they can fool people? Are there really sellers who buy SMBs without doing deep diligence?

With that being said, could you please give some insight into your diligence process and getting these guys on board? I've noticed a lot of SMB guys are real cagey with their documents/financials/materials. 

Sep 14, 2022 - 7:33am
takenotes08, what's your opinion? Comment below:

I ask for the following before LOI

- 3years of financials

- list of employees, their roles, salaries and tenure at the firm

- break down of client concentration (without client names)

- break down of revenue and pipeline

- list of any non recurring expenses (to calc EBITDA properly)
 

If it looks good I provide them with an LOI, and a list of things i'll need post LOI. Post LOI we get a QOE done and if it all looks good we close. If an owner ever gives pushback on providing information I tell them they are providing it or deal is dead on spot. 

Aug 24, 2022 - 8:30am
FlashyKaptain, what's your opinion? Comment below:

We are in the process of doing this (with a partner), with a relatively steady, low growth ~$1.5M EBITDA business. The deal is currently under LOI.

Happy to provide updates as we progress! We're just starting so I'm not sure how much value I could provided lol but if I can help just DM me!  

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Aug 24, 2022 - 11:48am
AttackSnail, what's your opinion? Comment below:

Would love to hear updates! Good luck with everything.

In your experience, what does it mean when a seller is unwilling to provide certain materials post-NDA? Current seller wants me to provide proof of personal finances and won't move forward without it. I told him I won't provide that, and that can't raise private capital without sufficiently being able to articulate the investment opportunity, which can't be done without his materials. Seems like we're in a loop. How often is it that you come across hard-headed sellers who have little knowledge of how deals actually work?

Aug 24, 2022 - 1:11pm
FlashyKaptain, what's your opinion? Comment below:

Probably not the answer you're looking for but really, "it depends".

It sounds like you're well aware from your comments, but to reiterate, the expectation for quality and availability of information unfortunately needs to come way down. I've worked in sell-side M&A in this space for 5+ years and, being on the other side of the table, it's amazing to see how little data some of these companies have (even some with $250M+ in revenue, lol).

For the most part, I'd go in assuming that the seller knows nothing about deal process (including info requirements for both diligence and financing purposes, as well as "normal" deal timeframes). A lot of these sellers will assume this is like selling a building - agree on price, do some very limited diligence (maybe 2-4 weeks) and then close. They've generally never experienced an M&A transaction.

I know that having proof / confidence of financing is often very important for these sellers. Most have dealt with inexperienced buyers before who wasted a few months of their lives before not being able to close due to financing reasons. Very very common in this space.

Are you able to profile (confidentially even) who some of your potential backers may be? Even if the capital isn't committed, if you have some weight behind you in terms of potential investors, that would go a long way.

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Aug 24, 2022 - 12:18pm
AttackSnail, what's your opinion? Comment below:

How so? Good amount of people chiming in with their experiences as well as people sharing good resources and advice.

I agree that the SMB space is horrifying to someone like you and I who have had traditional finance experience. We'd be playing a game with people who haven't ever been taught the rules the same way you and I have. The quality of management/operators, information, and the process as a whole is far below what high finance professionals are used to. Even the intermediaries (business brokers, buy and large) lack any sort of real competence, sense of urgency, or communication skills. Lots of opportunity to get burned, and waste lots of time and money. Unfortunately that is the reality of this bottom-market space. The markets here are good because they're way less efficient and have greater opportunity for profit but, the catch is that you're often dealing with the bottom-feeders. It sucks and is scary but from what I have been learning I think it just comes down to being savvy, aggressive, and careful. 

Sep 12, 2022 - 7:11pm
jbernhardt, what's your opinion? Comment below:

I don't have experience with buying anything myself, however the company I work at specializes in debt financing for small to medium size companies. We are meeting tomorrow with someone who has done exactly this and has been extremely successful. We're going to discuss helping him fund a couple of $10-12MM deals. Let me know if you ever need help funding. We focus on deals with a debt piece $5MM+ but maybe you'll get there!

  • Associate 1 in IB - Cov
Sep 13, 2022 - 5:31am

Sounds like C6 Capital? I had them reach out to me before when I was interested in buying a SME. Seems like a nice little niche they have carved themselves. 

Sep 13, 2022 - 1:29am
WSOUserName65, what's your opinion? Comment below:

Yes. Me and three buddies from banking 10 years ago have two different roll ups we do in our spare time. One is up to $500k of ebitda after 6 years, the other is up to $1.5mm of ebitda after 2 years. Obviously the second one is going much better than the first. Takes maybe 5 hours a week outside of acquisitions and integrating. Buying the businesses at 2 - 3x w/o real estate and 4x - 6x with the real estate. Using SBA 7a loans to get 100% LTV, going to refinance next year to get rid of the PGs. Nice side hustle.

Sep 13, 2022 - 11:02am
AttackSnail, what's your opinion? Comment below:

Wow that's fantastic. Guessing that's 5hours/week for each guy so still even if it was 20hours/week that's not bad for $2mm of EBITDA

What have been your biggest challenges so far? What have you been able to learn from the first that allowed you to be so successful with the second?

Also, without going into too much detail, what level of your personal net worth were you comfortable putting on the line to guarantee these SBA loans? I can't imagine it is much when spread across 4 likely well-off dudes. In the SBA realm, how does refinancing remove the personal guarantee?

Sep 13, 2022 - 1:59pm
WSOUserName65, what's your opinion? Comment below:

In our first one we targeted too niche of a sector where even if we bought the five largest players in the space (of which we are now one of) you probably would not get past $5mm of EBITDA.  Second one is also a highly fragmented space which is mainly owned by baby boomers, but the market depth is much deeper and the tailwinds are better meaning we are seeing much better businesses for sale much more frequently.  Largest business brokers in the space know us and know we have real money so they give us a first look.  They know we compete well on price in certain geographies and environments whereas we are uncompetitive in others.   

Challenges haven't been too bad.  Make sure to verify the numbers before you buy (never had an issue here, but got close to buying one before we figured out there were some material expenses not being accurately reflected).  Hire good employees, hire good managers, make sure everyone knows what their responsibilities are, and things tend to take care of themselves.  Make sure you monitor the numbers on a weekly basis and when things start veering off track you are quick to correct them.  We have been slow to correct some bad choices a new GM made around scheduling hours at one of our locations - we are almost back on track but it has been a little unpleasant getting here and saying she either needed to make these corrections herself as the GM or we would need to make the corrections for her. 

SBA guarantees are joint and several, so just under 2x my personal net worth (excluding the value of the businesses + real estate itself).  That being said, if you take only my 25% share it is closer to half my net worth (again, not including the underlying businesses or real estate).  We have never had an EBITDA negative month at any individual location, much less the broader company and the terms of the debt are mostly 6% fixed w/ a 25 year amort.         

Sep 13, 2022 - 7:36pm
optionplayer1, what's your opinion? Comment below:

How do you balance a PE gig and acquiring /running the business from both a compliance standpoint and time perspective? How large were they when you bought them / were you able to have a full time GM from the start?

Very interested in doing something similar in the future.

Sep 15, 2022 - 12:10am
WSOUserName65, what's your opinion? Comment below:

No personal life, haha.  I told my employer before I joined I owned a couple small businesses and they were fine with it.  I also own everything through a SPV which means I can buy my stake through the SPV and technically never need to invest into a new business / run it by compliance each time I buy a new one.

On both businesses we started with GM's, but as the businesses expanded we spent the money to hire a regional manager for each.  Best decision ever.  Yeah, it costs maybe $100k each, but the amount of time and headache they save us is well worth it.  Also allows us to focus on expanding rather than the day to day of random problems that need to be solved like a broken coffee maker or leaky roof.

Sep 13, 2022 - 9:33pm
rameau, what's your opinion? Comment below:

A little late to the party here, but I have some experience in this space and would echo a lot of the sentiment here, but positive and negative. My DMs are open for anyone seriously considering going the small business route, but please note it will take awhile for me to respond (this is an alt account).

Sep 14, 2022 - 6:38pm
IBJunior, what's your opinion? Comment below:

Curios to see if anyone has done this in Canada and what their experiences were with sourcing and financing? Thanks!

Sep 16, 2022 - 4:10pm
throwawaybadabing, what's your opinion? Comment below:

Be prepared for a lot of stress if you go this route. Know your risk tolerance and mental tenacity. If the latter - great. If you consider yourself to be risk averse - don't do it. 

  • Principal in RE - Comm
Sep 20, 2022 - 10:58pm

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Sep 21, 2022 - 4:28pm
mrdistatty, what's your opinion? Comment below:

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