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