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.

 

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. 

 

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. 

 

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.

 

Very interesting, thanks!

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

 

Can someone explain how this is different from a search fund?

 

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