Safest Small Business Acquisition?
My dad and I want to acquire a small business and are willing to put together a combined 100-200k for the down payment depending on what we find. Obviously we have to do the search ourselves but does anyone have any opinion on what type of business would be the safest option as far as knowing post diligence that EBITDA will not go away post acquisition?
Sadly such a thing doesn’t exist, especially at that sub scale, unless you built or invented it yourself. You’ll also be competing with the thousands of unemployed PE VPs and associates or unemployed HBS grads. What region are you located in?
Chicago
Manufacturing businesses with long-time owners who have an established clientele that is relatively concentrated (ie - has 10-25 customers that make up 30-50% of the revenue compared to having 1,000 customers that each make up 0.1%). There are a few reasons for this.
(1) Such manufacturing businesses are generally easier to finance. There is a reason why the private equity industry started with manufacturing businesses with retiring owners.
(2) You are generally not constrained by key-person risk. Outside of what's discussed below, if someone leaves it won't tank your business. This isn't the case for a lot of other businesses.
(3) Such businesses generally have actual relationships with their customers. It isn't like buying something from Amazon. The business will generally have an employee, or employees, that engage with the customer. This is really important. This means you can have a glorified TSA to ensure that these employees are properly handing off the relationship. This is more important when the relationship is one the owner has with the customer which generally can be accounted for through an earnout tied to customer retention and giving the seller a consulting contract over the earnout period so they can make sure the transition is a smooth one. This is less important but still relevant with employees holding the relationship but that can generally be accounted for in how you structure the compensation.
You ask (indirectly) how do you ensure the company won't stop performing post-acquisition. This is a good question. The answer is above and is part of why I think these specific types of manufacturing companies make good targets for people in your situation.
Companies that do inspection work especially with gov contracts. Low capex and stable revenue from what I’ve seen
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