SMB Acquisition
Looking for advice from anyone who has done or explored a self-funded search for a small business. I am considering trying to buy a small $500k-1mm EBITDA business with personal capital and an SBA loan. Would likely do something like 40% equity, 60% SBA loan and sellers note vs the more aggressive financing that some people do to give myself a decent buffer for things to go wrong.
I know people shit on it frequently on here, but looking for advice from anyone who actually has firsthand experience with it. The low 3-4x multiples people claim to pay seem incredibly attractive to me and seem to build in a lot of room for things to go awry before you are fucked. Namely curious about:
- what drove you to do it/not do it if you explored and decided against it
- Common things people overlook other than the obvious “running a small business is a lot harder than people think”
- Do you think market has gotten too competitive/saturated with searchers in the last couple of years?
- Any things you wish you knew before pursuing it?
I have always wanted to have more control over my financial/career future and am sick of working for people. I have explored this path on my own and a few years ago when I was going through MBA, and it’s always been in the back of my head as an interesting opportunity that sounds very appealing for a variety of reasons. I am not interested in doing the more institutionalized search for a larger business with equity investors, because I get the sense it’s a lot more competitive and I also want to have control of the equity / ability to hold indefinitely. I have substantial savings ($7mm NW excluding house) so can afford to live off my investments for 2 or so years while looking for something to buy. Any thoughts from you all on here would be much appreciated.
You would be really well off having conversations with people who work in LMM. We are all too familiar with the hiccups and bumps unique to small deals. It’s the wild west out here fr my guy
Do LMM funds go this small? My understanding was they are playing more in the $1.5mm+ EBITDA space where normal search funds operate.
IMO the numbers at that point are semantics. They're small ass businesses with probably terrible record keeping, high customer/vendor concentrations. Not saying it's a bad place to traffic but $500k in EBITDA doesn't really make a big difference IMO as far as what the company probably is.
I’d say that’s correct for the most part, I have heard a couple times of smaller 1.5-2mm EBITDA add-ons though so there is - albeit rarely - some overlap. My main point here though is that those working in that sub 5mm market know the lack of systems and reporting in these companies, which is a factor to be aware of & to proactively handle throughout due diligence (ie it will likely be a heavy lift on your part to get the data you need to feel comfortable).
Slightly different situation as I came into a platform of a handful of businesses in this size range (mostly on / a little below the lower end) as a family business, but have done three acquisitions since I joined. Some unorganized thoughts that touch on a few of your points:
-I've never seen anything worth buying buying for 3x, especially as you approached mid-upper six figured in ebitda. Most are priced around at least 5x, which is still a nice yield, but parsing out the quality of that figure against dubious owner expenses etc can be challenging and requires a high yield as a margin of error.
-It makes total sense that the market have become more saturated as this route has surged in popularity. Even so, that has not been optically apparent to me so far. Maybe it's a geography thing, maybe an industry segment thing, I don't know. The business I run, which is a notable manufactured product brand in a small/niche market, has been contacted by one searcher and one sell-side broker. I'm honestly surprised because you hear stories of HVAC folks getting emails every day about an acquisition. Our other businesses have been prospected, but rarely and mostly by strategics.
-There's a high level of geographic determinism here. We only do manufacturing / industrials and are located in the midwest, so we see a reasonable flow of prospects. Are you willing to move (uproot your life and family) to a potential acquisition or are you going to limit yourself to an x mile radius? Depending on where you're located and what type of business you're looking for, that can really narrow the deal funnel. At the same time, I'm not sure how much sense it makes to move just to buy a business if you're already settled.
-I probably would not still be doing this if not for it being a family business. But that's purely because I have a passion for / am good at public investing vs the multifaceted role this requires. I have to solve problems across every spectrum imaginable; that's a draw for some personalities vs others. And at this size, it is literally you doing the problem solving; there is no management depth. Website / computer issue? There's no 100 person IT that will solve that in 5 min. Get a bogus lawsuit from a competitor? Despite having zero legal experience, I am the chief legal officer. This is a rare occurrence, but I spent a few hours today packing boxes for a rush order since an employee recently quit and we needed all the hands we could get. This variety is great for some people.
I love the autonomy in this seat (I don't have to ask anyone's permission if I want to travel or show up late one day). At the same time, I work in some capacity six days a week (including when I'm out of town), probably an experience you're already familiar with if you work in PE/HF.
-Last thing I'll mention is that since this is a necessarily long-term investment, it might be easy to be flippant about near-term performance. I believe it's a common phenomenon to have a down year the first year of new ownership (I think that was mentioned or studied by those harvard search fund guys on a podcast recently). With debt, that can turn into a crisis quickly. We bought a business coming out of covid that we recognized was benefitting from tailwinds. We're cash buyers so we could sustained a downturn. We beat out another bidder who offered the same $ but SBA financed. I'm 100% sure they would have gone bankrupt if they succeeded in buying the business.
Incredibly helpful, thank you.
Part of the challenge for me figuring this out has been that I am geographically constrained (wife+kids+extended family in my mid-sized city) so can’t cast as wide of a net as is probably ideal. Something I’ve been thinking a lot about.
And yeah I’m definitely eyes wide open on how “grind-y” for lack of a better term running a small business can be. But probably even still am underestimating how difficult it can be.
chiming in here as I work in LMM / MM and would eventually want to buy out my own business. One of the constraints in my geos is that I‘l need to provide at least 25% cash on hand equity.
So even for a moderately priced business, say at 4-5x 1m EBITDA, I‘ll have to come up with 1m of own cash which I do not have. Is it best to onboard 2-3 private „LPs“ (individuals) to invest alongside or how would you approach this?
Buying a small business means you become the owner of a small business. You have to actually operate the business.
Just know, this is a fundamentally different thing than working in finance.
I am aware, also sort of the point of this career move.
Are you aware? Do you know what owning a small business means your job will actually look like?
The point I am making is not about your actual knowledge. You may or may not know. I don't know what you know. I am saying this and am reiterating it because owning a small business means your actual day job will involve a lot more "administrative"/"tedious"/"uninteresting"/"HR or HR adjacent"/etc tasks than whatever it is you are likely thinking.
Bro do it. I work / have worked in LMM PE / PC and see this all the time. I also did my MBA where search was a big focus so I get the itch there too. Some of the guys I’ve come across who have done this very successfully are totally mediocre guys. So how have they done it? They were willing to try. I’m sure it’s harder than people think… but so is a successful Wall Street career. I will be right behind you on attempting this for the same reason. My goal is to hit $1.5-2.0mm before trying (just crossed $1mm).
Mind expanding on how you hit $7mm? That’s crazy to think of from a W2 job, even a high paying one
Thanks, yeah feels like a bit of a leap of faith but payoff is it seems like if successful it would be a lot more rewarding. Also given our financial situation I can fail without it blowing us up.
Was lucky very early on in my career to be one of the first employees at firm that is also where I met my wife. It exited to a PE buyer within a couple years and netted us combined around $4m post-tax. Truly just a right place right time situation and having it doubled through my wife was gravy on top. Went to MBA after the exit and moved into AM out of that. Then just saving and investing aggressively in a bull market got us the rest of the way. I didn’t have student loans or anything from undergrad which helped as well. We don’t have an expensive lifestyle either but kids have definitely increased our normal spend in the last couple of years.
Nice man, good for you. A couple things you might find interesting:
Think Big Buy Small podcast. ETA podcast from HBS profs. Pretty useful and they bring on guests who successfully did this
I already feel demoralized when a one-day market swing can equate to 2-3x my paycheck. You must feel the same that it makes very little difference to get the W2 income. You could even carve out $1mm of your NW to pursue this and have the rest compounding, generating income, etc.
Absolutely do it. People on this site, while extremely helpful and realistic as it extends to careers in finance, can at times overcomplicate and overestimate the ability to be successful in search/SME acquisition.
I say this as someone in banking who came from a family running a small business, where I spent my youth/summers handling what you would expect with sub $1m EBITDA business problems. The 17 year old front desk worker shows up high and late, your work order gets delayed by 3 weeks and you have to chase them down, a pipe bursts and you’re the one mopping the floors… all those things are true. If you’re a sole operator, then yes, be prepared to do the annoying menial tasks (if relevant to your business model). It is hard to run a small business. But in my opinion, it is equally as difficult to successfully succeed in climbing the elite finance career ladder, especially if you have few advantages/USPs that can differentiate yourself + excellent performance + a navigation of the intercompany/interindustry regime that is so critical to MF PE MD/Partnership, for example.
Not to beat a dead horse with this, but the only people yielding truly tail right outcomes financially in this world now are either those who have everything I just described above OR take a risk and spin out their own fund/endeavour that has a risk profile many here would find unappealing. You’re going to have to take risk regardless, and if you feel taking a risk to run a SME and scale from $750k EBITDA 5x over a decade is digestible, go for it.
Once you learn the nuance, you are competing with (and again, no disrespect as someone who grew up in the SME world), people less intelligent and motivated than you, on average vs. the sharpest, hardest working and most well connected counterparts of whom you are in competition for leadership/real $$$ in finance.
Now take this all as a caveat that you will work more hours than you probably budget for and a different profile of stress than you’re used to even compared to your startup experience. But a mid 8 figure exit after some success is a sweet reward.
Also since u have some money, please please hire a GM/manager to take th edge off of all of what I just said. Will help you immensely. Pay the market+, someone of quality. You will not regret.
Godspeed
Thanks - I’m definitely leaning towards going for it. I am set up financially already and have the opportunity to take some risk and potentially get a lot of upside and fulfillment that isn’t really there in my current role. I have been sort of “lost” career-wise lately and think what’s lacking is I haven’t really taken the leap and seen if I’m capable of being successful on my own, something I’ve always viewed as the “end goal” for me.
For someone that is less analytical but thrives in social and people driven environments, do you think they are better suited for the ETA path or would VC or a corporate path be a better fit?
I’m building out a conference in the Midwest for this pm and I can give you a lot of the resources and such
I bootstrapped, scaled/sold some businesses in this size range and now run a few business upstream.
I would NEVER do it again. I only did it because I had to lol.
If I had a trad finance background I'd:
-Raise money for a startup
-Raise money to buy something with at least ~$2m - $3m in EBITDA
OR I'd bootstrap something myself from 0.
Interesting. Can you clarify? You bootstrapped historically, but wouldn't do it again. You then mention you would consider bootstrapping something from 0.
You're right, my writing is a lil stupid.
I mean, I have a lot of money now and can easily spend 6 or 7 figures booting something up which is VERY different than when I started with like...a couple thousand bucks lol that I actually made through my first business (lol!)
Care to elaborate why you’d never do it again? Even if not bootstrapping?
No need to do it again lol
The best risk reward move for someone with a legit background (great school and great first job specifically) is finding some ambitious business owner in a high revenue per employee business and get on that team and ride the wave. You are looking for a biz with 50 employees.
You sound like a conscientious person. You are going to be infuriated by office politics and the lack of correlation between the impact you're making and your compensation (monetary or otherwise) in a big org. So the answer is a smaller biz or starting your own. You can achieve the majority of your experience and compensation goals by working for a small org without taking on all the risk and all the headaches of being a biz owner.
The only reason I started my own was because I do not and did not have the credentials to get hired by one of those companies. I am 8 years in and finally getting some momentum, but looking at my friends who were more prudent and aggressive both academically and professionally, they are doing WAY better than I am and have taken a fraction of the risk.
Another thing to consider is if you really just want to own your own business. If that is all that matters then go for it. You will succeed or you will fail, but regardless you will be better off for it. The only losers in small biz land are the ones who: do it for just the money or cheat. Absent those, I believe that if you spent your whole life just starting businesses and trying things that you will be successful eventually.
Thanks. I am somewhat later in my career (mid 30s). Have already had a good financial outcome from first job out of UG (was a rapidly growing smallish business so got lots of responsibility as you note). Have good resume along with good undergrad and MBA degrees. Just think I’m ready to be in charge of my own destiny. Obviously looking for financial upside but also just want more control. Think ultimately that’s impossible to get unless I am the owner. Also plays into why I’m going smaller so I don’t have to raise outside equity.
To your point RE: frustration on bigger org. I feel like I have no control over my outcome at this fund. It is entirely at the whims of flows and how generous my PMs are feeling. Right now flows are bad so I feel like I am sort of stuck slugging it out in hopes things turn around. Comp is obviously good by any metric and have upside in theory but for the next decade+ it will be dwarfed by the comp I already got in my 20s from the exit of my old firm. Probably also the case in a small business I’d buy but at least have more levers to pull and more control over the situation. And more control over my life.
Pick something with a moat that isn't money and go and run it down. Ideally its geographical or technical, but if it is just your intelligence/hustle to start that's ok too.
If you started tomorrow you wouldn't even recognize yourself or business 10 years from now. That is a good thing. Good luck, but you won't need it!
Jumping in as someone who has been in the space for a few years and has close friends who bought in the 600k–1.2m EBITDA range using SBA plus personal cash. I've acquired 3 deals in the HVAC space.
The biggest thing I would flag that does not get enough airtime is how different the search looks when you are geographically constrained. Everyone loves the theoretical “I’ll look nationwide and see 200 deals a year,” but if you are locked into one metro (kids, spouse, extended family, etc.), the funnel shrinks fast. That is not a dealbreaker, but it means your industry and geography matter more than your capital structure. A 700k EBITDA HVAC contractor with sticky recurring revenue in your city is very different from a 700k niche manufacturer three states away with a quirky owner and key man risk.
Second, do not underestimate how much of the first 12 to 18 months is rewiring basic systems. Not the fun “strategy” work, but stuff like: who orders inventory, who approves PTO, who calls the plumber when the bathroom floods, who fixes QuickBooks when it stops syncing. Most searchers I know were not shocked by the total hours. They were shocked by how much of their time went into cleaning up things the seller tolerated for 10 to 20 years.
On the “market is too competitive” point, my personal view is that people exaggerate this. Yes, there are more searchers and micro funds around. At the same time, the typical seller is still getting a lot of inbound from unserious buyers. Anyone who has real capital, can present like a normal human, and is willing to get on a plane and show up in person is already in the top tier of buyers. The operators I know who consistently win auctions at this size usually do it because they are the only ones who build real rapport with the seller and talk about taking care of the team.
Given your net worth and timeframe, your biggest edge is that you do not need to force a deal to justify the last 12 months of your life. You can wait for something that is actually clean: recurring revenue, low owner dependence, boring but stable. The horror stories I hear are almost always people who bought because they were tired of searching, not because the business was objectively good.
One other thing I would bake into your mental model is the cost of being the only adult in the room. If you find something that can support it, hiring a legit GM or ops lead earlier than you think can be the difference between being stuck at 600 to 800k forever vs. having a shot at 2 to 3m EBITDA over time. Plenty of people I know wish they had paid “market plus” for a strong right hand much earlier.
Given where you are financially, you are in a rare spot. You can treat this as a multi year career pivot instead of a Hail Mary. That alone puts you ahead of most people who are trying to do this with almost no cushion and a hard time limit from their investors.
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