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?
May 07, 2022May 07, 2022
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Comments (24)
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.
Completely false. SBA does this all the time. PG's are required, but you can definitely get 80%+ LTV via the SBA.
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.
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.
Personal guarantees. SBA will garnish your future wages if you default on your loan.
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.
Can you elaborate on how you can structure and limit the impact of SBA PG requirements?
How do you limit the impact of SBA PG?
I like investing and don't want to be the day to day manager of a small business, nor do I think I'd be good at it. Fundamentally different job with different skill sets
what kind of business are you thinking?
The question is general, but my preference would be heavy industry.
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.
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.
Interesting. Thanks for the recommendation, I'll check it
Very interesting, thanks!
any variation of this that doesn't require involvement in the day to day?
Do you mean like a search fund-of-funds? There are groups like Pacific Lake, but I think they operate similar to other PE shops, just focused on this fund/business size.
forgot I have the HBR and not read it yet. thanks for the reminder
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.
Because most people are afraid to PG an SBA loan to do this (rightfully so for many). There's a podcast called Acquiring Minds with Will Smith that's great for this subject, though. Check it out.
Can someone explain how this is different from a search fund?
I'm going to, saving up cash atm (recently bought a house so give me about 2 more yrs)
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