As title says, looking for a sounding board to hear any/all opinions on why buying a small business is a great or terrible idea.
Background
Currently a 1st year associate at a MM PE fund. Have been in the seat for ~6 months and have quickly realized that I can't see myself doing this for the rest of my life, for all of the reasons you might expect. I'm not willing to grind the next 15 years to maybe reach the partner level, and have come to realize that more generally I can't stand being chained to a desk for 14+ hours per day, 5 days per week. My fund is on the more operational side - as we are leaner there is a heavy component of day to day working with PortCo's on various initiatives. I do enjoy that component of the job, which I expected coming in. When I was in banking, my favorite assignment was one where we worked closely with a Company for a year+, and were heavily involved in various strategic discussions, not necessarily M&A related.
Current Situation
This brings me to my current situation. I have made up my mind that PE is not for me, and want to figure out what my next steps are. I have always felt that I had an entrepreneurial leaning, and would love to run my own business. I want to get deep in the weeds of running a day to day operation, and have no issues with rolling up my sleeves for more menial tasks, if it means I can contribute towards building something real.
I have been able to save a good chunk of change, and through my own funds + SBA loan, think my targeted EV range would be $600-$750k (~$150k of invested capital through some combination of my own equity check and any I can raise from friends/family, and then remainder via SBA loan). Assuming a 3-4x multiple, I could reasonably find a Company with EBITDA of ~$150-$200k.
I have no issues with a longer-term hold period (7-10 years), to build something of some scale before any meaningful liquidity events. A platform with EBITDA of $150k+ should have sufficient scale to pay myself a reasonably salary to float my current lifestyle, which is relatively modest.
Let me hear your thoughts, any considerations I'm missing, why this is a terrible idea, etc.
This has been beaten to death. Also if you don’t have any follow-on equity half your value is gone as you can’t roll up
Couldn’t roll up quickly, sure, but if it’s a cash flowing business could delever in 2-3 years, then lever up again to fund further M&A, and hopefully off a higher earnings base with some organic growth factored in
Using a relevant level of leverage, with interest rates where they are, you will not de-lever fast enough to build a platform of any sort of scale before you die.
I’ve thought about it as well, most of the no money down gurus have ‘training courses’ they try to sell. Most preach seller financing/notes as a way to close with no money down (duh). Cody Sanchez wants $10k membership to join her community of searchers/ETAs. Typically the SMEs under $5mm Revenue trade at 2-3x SDE.
I follow a couple of SME lenders and lawyers on LinkedIn that are good.
Seems like there’s a lot of boring, mom-n-pop services businesses that are strong cash flowing and at the very least, would be lucrative by paying dividends, excluding any roll-up (which obviously requires more financing / equity)
$200-150k “platform”? My brother in Christ, that’s not a platform, that’s just buying yourself a job.
lol, yeah platform not the right word here, point taken
Bootstrapped / bought a few businesses and coming from PE, I don’t get why you’d want something so small.
Partner with one of the firms backing searchmonkeys and take something down with at least $3m - $5m in EBITDA.
Would be great to hear about your process, I’ll shoot you a PM
I'll just post my reply here.
In a lot of ways, it's easier to run a larger company.
The only reason I did things the way I did is because I had no pedigree.
What sort of upside is left for the searcher in those cases?
I’d agree with this. I had considered the business in the lower EBITDA, but having family in small business already, it’s a lot better to buy something in the higher range.
Save more of your salary so you can have a bigger down payment for a business. I don’t see myself working for someone else for awhile, and hope to be an owner in the near future.
also need 10% in the deal for SBA 7a loan fyi
At the size of the check you are looking to cut, that is an extremely small business. You are buying yourself a job. Also you will probably be taking a pay cut to work longer hours than you are currently working, with obviously 10x more risk than in your current seat. All of that said, what exactly do you envision to be the financial upside for a business that small?
I think you should be able to find a business where you work full time in it for ~2-3x SDE. Think 3x+ is for absentee owners but i'm new to it as well
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