What's stopping you from buying a business with an LBO

If you make 6 digits, you are able to put the 15-20% of the price of a 7 digits business and take a loan on the collaterals of the target. So, why not do it and become a business owner?

Comments (24)

May 7, 2022 - 8:53am
BBDreamin, what's your opinion? Comment below:

Banks aren't going to allow you to lever-up a sub $5MM EBITDA business... you'll be lucky to get 2x leverage on a company < $5MM in EBITDA for an LBO... assuming a 4x multiple purchase price, you're going to be putting in ~50% equity. 

There's almost certainly going to be a significant collateral air-ball (> 35% and often times considerably more depending on purchase multiple) in an LBO.  

Needless to say, the smaller the business, the more risk for both the investor and the bank.

Most Helpful
May 7, 2022 - 10:23am
atls29, what's your opinion? Comment below:

Completely false. SBA does this all the time. PG's are required, but you can definitely get 80%+ LTV via the SBA. 

May 7, 2022 - 2:43pm
BBDreamin, what's your opinion? Comment below:

You're correct, I forgot about the SBA route. But yes, definitely comes with the draw back of needing to PG and if there's a collateral shortfall (there will be), they'll take a 2nd lien on your residence. So not the traditional type of LBO where you can just file for bankruptcy and walk away - definitely a lot more risky in the sense that you can lose your ass. 

additionally, the banks/SBA like to see that you have experience in the industry you're buying into so if you don't have that they might not lend to you. 

  • VP in CB
May 7, 2022 - 2:45pm

You can't just hire a management team to come in and run these tiny businesses given limited cash flow. You better believe you'll be rolling up your sleeves and running things day to day.

  • CEO in PE - Other
May 7, 2022 - 3:12pm

Personal guarantees. SBA will garnish your future wages if you default on your loan. 

  • Associate 1 in PE - LBOs
May 7, 2022 - 3:40pm

Because many finance folks are risk-averse cowards and don't want to rollup their sleeves to put in a real days work. 

There are ways to structure and limit the impact of SBA PG, or you can always raise capital from outside investors and retain a significant %. So you'll mostly hear excuses with the real reason being what I outlined above. 

  • 3
May 8, 2022 - 3:49am
Kevin25, what's your opinion? Comment below:

what would it produce?

trying to assess what kind of business you can buy with several $ mil. I can't imagine profitable heavy industry business that is worth only several $ mil.

May 8, 2022 - 10:22am
timberframe, what's your opinion? Comment below:

You're essentially talking about search funds. Google the HBR Guide to Buying a Small Business. This has been an increasingly common investment scheme since it was invented in the 80s at Stanford. Folks also call it "entrepreneurship through acquisition". There are courses on it at H/S/W and somewhere around 100 top MBA grads a year pursue it. Often the entrepreneur doesn't even need to contribute their own equity, they get an ownership stake in exchange for running the business, plus a salary usually in the 150-250 range. The podcast "Think Like an Owner" is an excellent introduction to the space, I found.

  • Analyst 2 in PE - LBOs
May 8, 2022 - 2:02pm

Very interesting, thanks!

any variation of this that doesn't require involvement in the day to day?

May 8, 2022 - 7:29pm
2rigged2fail, what's your opinion? Comment below:

forgot I have the HBR and not read it yet. thanks for the reminder

May 10, 2022 - 12:03am
equityanarchist, what's your opinion? Comment below:

Old boss was a 90's something HBS guy. Did this for awhile and eventually transitioned into an independent sponsor even raising a fund here and there. Interesting approach, will have you working like an analyst till you're 50 tho.

May 8, 2022 - 7:31pm
2rigged2fail, what's your opinion? Comment below:

I'm going to, saving up cash atm (recently bought a house so give me about 2 more yrs)

  • 1
  • Analyst 1 in IB - Cov
May 9, 2022 - 8:56pm

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