So here's my dilemma.
I'm working on finishing my undergrad. Long story short, one thing led to another and I was able to find full time work in commercial banking (including leveraged finance). Since I was working for a regional bank and wanted to move up, I felt that my unfinished degree would get in the way.
Breaking into PE was the goal. Even got some interest from an UMM PE shop out of Chicago. At the same time, my uncle is willing to sell me his business. He started a pizza shop 35 years ago and is now getting ready to retire. The business is getting sold one way or another, the question is, will I be the buyer?
His store is in Pennsylvania, where the cost of living is awesomely low. From what he tells me, I can earn $150-180K as a full-time owner/operator. Since I don't have significant equity saved up, he'll carry a seller note for a couple years and then I would theoretically refinance. He's got money saved up for retirement, plus I would be paying him on the note monthly.
As sexy as PE is, there are pros and cons to everything. Depending on the market, there's a chance I can earn up to $250K (including bonus). The caveat is that its going to be a market with a higher COL than Bumblefuck, PA. BTW, my uncle's pizza shop is not too far from UPenn, so its not extremely rural or anything. According to him, I can potentially earn more than he's making as a younger, more energetic/enthusiastic operator. The fact that I'll have to wear multiple hats is a double-edged sword; it won't be the same boring old tasks everyday, but the buck will stop with me. There isn't any prestige (possibly negative prestige? lol) and I won't be surrounded by white collar professionals (but hardworking folks nevertheless). There's a chance the business could fail under my watch, and there's a chance I could sell in a few years for $500K+. Even then, I won't be a millionaire by 30, but I'll be close enough for my satisfaction. Obviously, there wouldn't be any "exit opps". I'm not even sure how competitive I would be in the work force after an entrepreneurial stint.
If I can grow revenue and groom a loyal employee, there's a chance I can get superior work-life flexibility. Yes, no employee will work as hard as me as the owner, but if you pay fairly and treat employees with respect, I know they'll put in their all.
Lastly, this is rare opportunity. Either I take it or leave it, but the clock is ticking. Obviously gotta do what's right for me, but I value the feedback of other like minded people (especially those who have a background in PE or entrepreneurship!).
Be a true PE professional. Buy it from him and hire a CEO and you reap the benefits.
I love the tongue-in-cheek response above mine. It's worth considering, although important to note that you can just about never find someone worth their salt (will work as hard as you would) in the ultra lower middle market to comfortably allow someone else to be the primary operator.
Speaking seriously, at this stage in your life you should be thinking about finding the things that offer you the greatest potential to make yourself scale. Put another way, you want to be where you learn the most, not necessarily earn the most.
Done well, life looks like a logarithmic function, not a linear function. The only way this can happen is if you acquire key skills, knowledge, and relationships up-front during your 'flat' or negative period, because as you start to apply them, your trajectory steepens and you start to earn and do more every year for less on your part.
Looking at your situation, it's clear that private equity is the path that increases your scalability. Once you know the full end-to-end aspects of the role (sourcing, structure, oversight, exit, and fundraising), there is nothing preventing you from applying it to companies between $10m-10b TEV, whether as an employee of someone else's fund or as first man at your own.
The pizza shop opportunity does not seem very compelling. It is not a rare opportunity; the only thing uncommon about it was that it required no effort to source. There are higher-margin businesses of similar revenue and earnings that will support an identical financing structure but be way more (financially) responsive to new ownership.
There is nothing preventing you from pursuing them through the search fund or independent sponsor model with 'nights and weekends' work while carrying a day job. I have numerous friends who have done this for businesses between $15-700m in TEV. They left places as varied as Podunk-Partners-in-Denver and Carlyle.
One other lens to look at this through is switching cost. If you dislike a role in private equity, you can move to another role at a similar firm or change industries altogether simply by interviewing and providing two weeks' notice. If you dislike being a pizza proprietor, congrats, until you exit that business (ultra-lower-middle market businesses like this tend to be illiquid as fuck), you're stuck.
In short, you're not only going to get closer to your 'millionaire by 30' goal in private equity, but you're also going to learn something priceless: how to successfully close on and manage businesses. That will set you up to earn millions per deal for as long as you want to play ball.
I like your optimism, but how realistic is what your saying? Based on PE forums I've read on this site, it seems to be that many folks get burned out by their 3rd year as an Associate. That's understandable, given the workload and pressure. There are people asking about exit ops from PE lol. Plenty of people don't return to PE post-MBA, including those with pre-MBA experience. So with all this being said, what are chances you'll end up a Partner, let alone a firm founder?
Even though PE firms are leaner than say, banks, there are still hierarchies, and with hierarchies, come office politics. A good portion of any job is navigating office BS, like it or not. When I was in commercial banking, the job was entirely different every time I was assigned a new manager. Old managers would jump ship or get promoted. New managers would have their own way of running things. Sometimes it was for the better, sometimes for the worse, but always inconvenient. Plus, with owning a business, no one can pressure me into getting an MBA, unless I want it. PE firms can hold that over your head and prevent you from moving up. That last point may relate to office politics.
With a business, I can grow personally and professionally by opening more stores, franchising, partnering, etc. I think you're underestimating the skills that can be acquired via entrepreneurship. If all goes well, its possible one can move on to bigger and more lucrative business opportunities.
And if you think about it, the richest of the richest didn't make their billions from PE; its exclusively through entrepreneurship. I don't know exactly how much my uncle is worth, but I get the feeling its more substantial than most would think. His earnings have been above-average in a low-cost market, he (and his business) are free of debt, and I know he has investments in commercial real estate (e.g. hotels).
At the end of the day, there are just as many wealthy entrepreneurs (possibly more) as there are wealthy PE professionals. You just don't hear about the former as much. Many like to be under the radar, but when I was in commercial banking, I underwrote a deal for a guy worth north of $1B. His audit and tax returns were literally 250-300 pages! I was definitely caught off guard when I started working the deal!
I mean this kindly. You are reading forums; I am living it as a principal running deals of my own in private equity and private credit. I've observed a couple things:
I'm not downplaying how much growth comes from living in the trenches as an entrepreneur. I also know that a pizza shop is structurally limited in the opportunities it presents someone to scale. You can learn about supply chain, pricing, marketing, and operations ... for a low-margin, low-volume, location-bound business with no moat at all.
A private equity role can (but is not guaranteed to) teach those same topics plus more (actual deal work, negotiation [in a different way than you'd encounter trying to get lower pricing on flour and sauce from vendors], board management, and a litany of others) ... that are applicable to businesses of any industry, any margin, any size, any location.
I'm not disparaging entrepreneurship through acquisition. It's one of the most intellectually-stimulating classes at both HBS and GSB, has attracted a fantastic community of hard-working and sharp people, and is one route I've practiced in the past. If you re-read my comment to the OP, it never disparaged this route, I actually encouraged him to keep his eyes open for similar opportunities of a better caliber.
My overarching point was that if this is an interesting route, it's worth (a) developing and honing a robust and transferable skill-set first / (b) finding a better asset to acquire and operate / (c) ideally rinsing and repeating b with more than one play simultaneously.
Side note: if you think the lifestyle in private equity is demanding relative to entrepreneurship, let me tell you you've sure as shit got that backwards. If you're a (highly-paid) W2 employee, you get to shut down for the night and worry about things tomorrow. When you own something, you're the one who has to get up late at night because the place flooded, be the first one in the door every single day, hire and fire and hire more and fire more people, deal with everyone's psychological or emotional drama and play peacekeeper, lose sleep trying to juggle the actual operations of the business plus the strategic steering aspects. All of this gets easier the larger scale a business you have because you have the resources to hire people to take over all kinds of tasks, but the simple point is that the buck stops with you on everything.
Lastly, you're right that the single most exponential outcomes belong to entrepreneurs rather than investors. I actually believe the opposite about who you hear more about: the successful founder gets way more airtime than the silent guy stroking the check does.
I had a similar decision to make and ended down the small business route. I attended a top target and worked at a top BB. Here are my thoughts:
Pros:
You are your own boss. Hours will be just as intense but you have more control of your schedule.
Tax benefits.
Potential to expand and create a business and possibly sell to a lower middle market private equity firm. You could be the guy who has 10 pizza shops by 35, with maybe 1-2 million ebitda, and sell to a lower middle Market or Search fund guy for 5x. What I’m trying to get to here is that you have unlimited upside. You’re salary/compensation/carry is not determined by your boss.
Less competition. Looks like the best and brightest these days are heading to top tech firms and high finance. Small business space is being ignored. My personal prediction is that there are way too many investors and not many small business entrepreneurs. If the best and the brightest are all on the finance side, what do you think will happen to the few businesses that are still in operation and profitable? Valuations will start moving up. You are already seeing a ton of dry powder in the private equity space. I wouldn’t be surprised if lower middle market PE firms start buying at 10x multiples in the next 10 years.
Love life. If a girl loves you as a pizza shop owner, she loves you for who you are not for your money or status.
Cons:
Love life. Yes, this is a pro and a con. Do you think a high earning physician/lawyer/comp sci/finance girl is going want to marry a pizza shop owner? Lol. This is a much bigger con than you think. A lot of people want to do the dual income nonsense with a steady life, but I much rather prefer marrying a girl who loves me for who I am rather than my job. I would prefer a supportive partner as a spouse rather than another earner.
Prestige. No one in society will respect you as a small business owner. Very unfortunate but this is the type of society we live in. I have lost many “friends” and consistently receive harsh judgements from family.
Disposal income. All of my earnings are being reinvested in my business. I just meet by basic lifestyle expenses (no fancy cars or homes). I do not invest in the stock market as my rate of return is higher if I reinvested in my own business.
Risk of losing everything and going nowhere
Conclusion:
With all respect to APAE, I do believe he is giving you the right advice. However, I feel that he is painting the industry in a rosier picture than what it seems. There is a post on an older thread where he mentions that a 10th year Mananging director can make 7 million a year. While I do believe this is possible, this is hardly the case and highly unlikely. The UK has mandatory regulations requiring banks to report the number of individuals who are compensated over a million euros (aka code staff):
https://news.efinancialcareers.com/us-en/159654/salaries-and-bonuses-go…
In the UK, there’s only 7 Goldman employees who were compensated over 6 million euros, most probably all senior partners at the firm.
From my old firm, I personally know some VPs who were laid off and could not find a comparable job. Some tried entrepreneurship, but with a family and children it’s hard to justify especially since most VPs do not have substantial savings. It’s much tougher to pull of when you’re older.
Regarding business school, I do not know how M7 b schools view small business experience. I have heard entrepreneurs are looked at a negative light? Maybe someone can chime in.
I would personally take the the PE role if I were you. I never worked in PE, but I do feel it would have helped greatly in building my business, even if it’s for a year. That being said, a year is a long time. You could theoretically learn everything online ( it will also probably take over a year to settle in your business). Go on bizbuysell; I do not believe your uncle is offering anything special. A business that does 180k net can easily be bought for a very low multiple. However, it could be a good deal if your uncle offers you good terms. He may see your hard work and efforts and give you the business for nearly free. Good luck
This is the best addition so far.
I am happy to see multiple points of feedback that my original comment wasn't clear enough in highlighting that if entrepreneurship is of interest, it's worth pursuing, but that the opportunity has to be the right one.
I thought about this a bit more given all the notifications it's generated. Put simply, if you want to own an asset, find one that you can scale really well. I remain dubious that a pizza shop fits that profile best. It may fit, but not as well as other things that are easily available to you (through broker platforms like the one joe419767 mentioned or Axial or similar).
This doesn't come from any sense of snobbery, I'm helping two different guys out of the HBS search community right now while they close on $2m and $6m lower-middle market transactions.
If you want to alleviate the 'branding' issue joe419767 alluded to (which is real), simply position yourself as a search fund. You'll own the same business, but all of a sudden you're the general partner of a small investment vehicle as opposed to pizza boy.
On the comment that I may be painting too rosy a picture of a private market investing career, that's fair. One memory that stands out is getting pushback once in a thread here about living expenses, that "no one even on the megafund route is spending $15k/month on an apartment".
I think it's imperative to identify your own biases. I took some risks very early on and they worked out for me, I'm lucky. So the guys I'm around, the deals I now work on, the way I refer to income and spend ... is all colored by that. I'm guilty, and I could be more careful in how I describe things that really are outliers.
Great comment.
After 35 years in the business, is your uncle in the spot that you wish to be in 35 years from now?
How old are you? I get the tricky spot that you're in. Truthfully, even though it's unsexy, if you could make 200-250k in Philly, you'd be a king in Philly. Sure being the owner of a pizza shop or chain of pizza shops isn't that exciting, but in your early 20s or so, that's actually pretty awesome.
Running a simple COL calculation, $250k in Philly is ~$525k in NYC. Given your non ivy type of background, getting into and succeeding at a Megafund will be a long shot. Even if you found a spot at a good MM shop in NYC, you're probably years away from pulling in $500k+ all-in, and that's if you can:
With that being said, you'll likely have less upside both with the pizza shop and the lifestyle. Maybe the shop expands and you make a little more money, but sounds like it's unlikely you're going to be making millions the way you could potentially do in PE/Banking. You also don't get the experience or learning that you'd get in PE. You'd still get great operating experience, but PE and the operating experience associated with it has its own cache, which is transferrable.
If you're young, I'd probably take the Pizza shop deal, give yourself a few years to see what happens and worst case, you go back to B school after, you'd have money saved and a unique story. From there you could get into banking or maybe even some type of retail PE. Plus you'll have run a business and you'll still be young enough to hustle in some major city if you want that experience.
If you're older(late 20s and older) it kind of depends on how close you are to settling down and where you want to settle. Do you care about living in a big city? Do you really want to try your hand at PE? While it will be a good experience, there's a relatively high likelihood you'll never make it to the point where you're making millions a year. At least, not without 10+ years of grinding away on deals, travel, missed family events, cancelled vacations, etc.
You're in a good spot, I'm sure lots of mid-level PE guys and bankers would take the deal you have, but they've also experienced the highs and lows of high finance and some don't want to stay on that path.
My tldr gut feeling is to buy the pizza shop and try it out for a few years. If not, let me know what your uncle's phone number is :)
Be the pizza man, the experience you gain might be something unrivaled by the typical PE role assuming that you can just get it. There is nothing like a sure thing, its in front of you with family support. If you fail you still learn and make some money in the meantime and then you apply to UPenn, or whatever other business school you like and make the transition then if you want. Good luck with your decision, quite an interesting dilemma.
To finish my thought from above, probably the most important thing to ponder is being brutally honest with yourself and answering these questions:
Generally speaking, the guy who wants to own/ operate a pizza joint and perhaps build it into an empire is not the same cat who wants to climb the corp ladder and become a principal of a prestigious firm. Even if the money was identical, you'll get there a very different way. Your personal self worth (which is important because how you feel about what you're doing will be a positive or negative driver) will be tied to this. These are two very different scenarios on many levels. Hard to imagine one guy feeling equally excited about both.
Regarding an upstream comment about hours, my experience in the entrepreneur path is it's 24/7/365. You may not be working all the time but you'll be thinking about it all the time, especially in the early yrs (If you're trying to build something). I literally make no distinction between my work and private time. Work isn't a place I go, it's a thing I do to move stuff through the pipeline.
Pizza shop. Get Portnoy to do a pizza review, then:
You can always buy a pizza shop. If you do so now, you'll likely never have an opportunity to enter finance like this again.
If you really want to be a small business owner, that's fine. Doing 2-3 years of private equity first will help you set aside a small nest egg to finance the acquisition and will provide strong resume power should you ever decide to do something else.
At your age, work life balance shouldn't be a primary consideration. We're talking 1-2 years, maybe 3 if you know you want to get out. Go, get burned out, save money while you're there (i.e. live your anticipated lifestyle after leaving PE) and then go buy a small business with a smaller financial burden and a good resume backup plan. It will leave the door open to b-school as well (no top b-school is going to admit a pizza shop owner). Whether or not that is a goal now, it might be later. Running a pizza shop is probably going to get boring fast.
I get what you're saying, but I think you're missing the point. The intent isn't to be a pizza maker for the rest of my professional career. It would just be a foot in the door. Unlike a conventional job, I could use financial leverage to grow the business from one shop to multiple (just like PE). Its a strategy that could back-fire, but its not like everyone in PE will turn out to be the next Leon Black or Mitt Romney. As a matter of fact, the most famous PE investors are outliers in that they were the industry's pioneers. That can't happen again obviously, because the industry is already mature at this point. Also, the future of PE isn't a solid as it use to be. Investors are balking at high fees. Certain institutional investors are going in-house. Some are demanding to be co-investors instead of LPs. Family offices are rapidly becoming aggressive PE competitors. And all of this is going on right now...in a bull market. What happens when the economy slows down and there's a pull back? The hedge fund industry is already getting screwed, so its not a stretch that PE could face its own headwinds. After all, hedge funds and private equity are the same asset class.
With respect to my uncle's business, it won't be possible to acquire an asset with only 5-10% equity (with a seller note), reasonable financing terms (again, thanks to seller note), and not have to worry about material omissions or exaggerations during due diligence. Plus, the business has a proven track record, untapped potential, and is an unsexy business. That last part is an asset as far as I'm concerned, because the less sexy a business is, the less attention it gets from competitors. At the end of the day, I don't care if its not a sexy business, as long as its lucrative (and legal). And it doesn't hurt that its logically recession proof.
The egotistical side of me is saying to go the PE route, just to prove that I can keep up in the rat race. However the cunning side of me is saying to think outside the box and go against the grain. In either case, there will be trade offs, so maybe I should have been more attentive when learning about Game Theory lol.
No, I think you're missing the point. If you want to be in a professional career, this is a bad idea. If you want to be a small business owner and are comfortable with the big opportunity cost this entails, this is a good idea.
But a few things to keep in mind.
The real issues here have nothing to do with the state of the PE market vs the Pizza market and have everything to do with the opportunity cost of gaining zero professional experience in your early career. You'll learn plenty in return - supervisory experience, the ups and downs of owning a small business, you'll probably know how to make a great pizza. But chances are high that you're vastly limiting opportunities for yourself down the line.
Listen, all this is fine. Lots of people skip out on the rat race for working class jobs. Just be honest with yourself. You're not finding some secret sauce alternative to PE that all the jerks in high finance have missed out on all this time. You're settling for an OK middle class opportunity that fell in your lap at a good price.
As a current MBA business schools">M7 B School student intent on executing a search funded transaction within the next couple of years after gaining more commercial experience, I have grappled with the similar question of do I continue to l legitimize my professional cred/toolkit or jump right into an entrepreneurial role where I can make a big difference over a couple years.
Should you get a PE role and spend a couple years learning what to look for in good deals, Imagine this deal coming across a future you’s desk. Would you still choose this particular business to buy? I’m thinking hard no.
I tend to agree with some of the guidance that preserving your optionality should be prioritized here. Going the pizza shop route could close many doors whereas going a traditional PE route will at a minimum give you more perspective, If not open the door to many more mentors/LMM industries/deals
Don’t pass up an awesome chance to build on your commercial banking foundation and to gain legit credibility as a buyout legend before you limit yourself to only buying pizza shops.
A seller note is pretty key for most ETA transactions anyway and does not make this opportunity unique. Also, I’m sure there is some family pressure. Might be best to take a step back and think about this from an investor standpoint- it’s awesome that you have an opportunity to buy a business here but given your entrepreneurial chops, there will be others that look good to you down the road. The real hurdle I think you’ll have to overcome in the future, if you go the pizza shop route, is not having the industry cred or connections to line up more complex investment dollars (especially from career PE guys) when you are ready to buy other businesses.
You're right, as a PE professional, I wouldn't consider my uncle's pizza shop as a potential investment. The difference, however, is that I'm not a PE professional currently. Obviously, PE investors have a bigger capital base, go after larger deals, are focused on a few industries only (rarely restaurants), have investor expectations to tend to, and a portfolio of businesses that share back office functions (aka synergies).
I have until the summer to figure it out. To be sure, I'm still exploring potential PE opportunities and networking my ass off. We'll see where all this leads. Obviously, breaking into PE isn't a piece of cake, and the frustration of it is what's making the pizza business more appealing. Admittedly, I feel like a pussy saying that. But my income as a small business owner would be the similar as a PE associate. Of course I would have to grind to make my operation bigger, but I like having control over that. If you're satisfied (or complacent) being a PE associate, you can't be one at 40 years old. With entrepreneurship, you scale if/when you're comfortable.
Actually recently met a guy who was in PE pre-MBA and now he's having a hard time getting back in post-MBA. Maybe he sucks and got lucky the first time, who knows? Can't blame him entirely though, given how intense competition is. If it weren't for his student loans, he said he would seriously consider a search fund.
My immediate family wants me to go with the standard 9-to-5 job (even though that doesn't exist in high-finance). Thing is, they're risk averse and consider being an entrepreneur as blue collar (its a cultural thing). Needless to say, they don't really even know the difference between retail banking and PE lol. My uncle, the one who's business it is, has an entirely different perspective. To be a fair, his ego is a bit inflated because as far as he's concerned, he "made it". He "values" not having to report to anyone else (except his wife lol). Sure he's not Leon Black or anything, but for a guy that went to a state school for one semester before dropping out, retiring with a net worth of $6-8MM isn't too shabby (I'm estimating based on his assets that I know of...he also hates debt, so he would've sucked at PE haha). The pizza shop is his only business, the rest of his investments are passive, including other businesses in which he's only a silent partner. Even the pizza shop has a full-time manager, which is why we think it can do even better if I decide to be hands on. In theory, I could just keep the manager and reap the profits. That is, until the manager randomly quits one day lol.
Given that I'm more educated and experienced than my uncle was at my age, he's saying that I can do even better than him. Plus, its implied that he would mentor me when I need advice or something.
I think APAE has dropped some serious knowledge. Heed his/her words carefully.
There are 2 questions here: 1) do you think the pizza business is a good business, and this shop is the way in 2) do you want to throw away your PE/finance career to be a small business owner
Point 1 is easy - no.
Point 2 is a personal choice - will frame below.
You talked about leveraging the pizza company and growing it. Wrong. No one is going to give you massive leverage against a small, low-margin F&B business. It is RARE that a small business like a pizza joint can hit stratospheric scalable growth. That's just wishful thinking and you need to put your finance hat back on when you look at it.
F&B is one of the worst type of business to own. Margins are thin, there's little differentiation, and competition is killer. If this was a software company, we'd be having a different conversation - but F&B? Seriously, you want to think twice if you even want to be an owner, much less whether you want to throw a PE career out the window to get there.
Are you good at running a pizza shop? We know you're good at PE. Want to risk throwing away something you're good at for something that maybe you'll be good at, maybe will suck at? Not a smart move.
You could buy the pizza shop and keep working in PE, while hiring a CEO to manage the business. In fact, there's a number of my former IBD co-workers who set up a restaurant group here in Hong Kong. It's doing REALLY well actually. They enjoy the process of owning and growing a food-related business, and they can get those jollies while still working in a scalable, upward-moving IBD role (now they are all MDs). In fact, most restaurants need to subsidized for years in order to get volume up to break-even levels. Having money from finance jobs to do that subsidization helped. And since not a single one of these MDs had restaurant experience, they hired experts in those managerial areas. So, it IS possible to own a business, AND still build a finance career. You just have to find some amazing CEO that you can trust to run the day-to-day, and not steal from the till. You can have your cake and eat it too. In fact, rather than have your uncle retire fully, can he train up the new CEO? Get a high school buddy of yours to take the reins.