Buying a business vs. PE
I’ll be working in IB as an analyst and as I live a pretty modest life, I plan to save a majority of my income. Has anyone after their analyst stint purchased a business to run rather than exiting to PE and working at a firm. Open to hearing all opinions on this!
I mean if you have like 100k what can you really buy?
A dirty laundromat with leverage, but at least the 23 year old would be CEO!
6x leverage?
While I know the multiples in the current market are crazy, with 200k and 5x leverage, would one not be able to buy a 200k EBITDA business to then operate
I semi-seriously thought about this (not necessarily buying a biz, but general entrepreneurship) when leaving PE and the easiest route would not be to acquire a business but to start a franchise. There are a fair number of good franchises that you can start with low six figures in capital (say $100-200k) since you can get a SBA loan for the rest of it.
There was also a good thread on here from a long while back about franchises. I believe Jimmy John's was called out as a particularly good one (low start up costs, and something like only 2 failed in the past x years.)
Sounds like a search fund would be up your alley
One question I have been wondering regarding search funds is why investors would commit their capital for someone to search for a business until purchasing one. Why not invest in a PE fund or another asset class?
It's usually a $$$ threshhold issue. If you have $10m to invest in PE you may be able to be an LP in one single (and prob small) fund - concentrated risk.
Or you can invest $1-2m each in 5-10 different search funds and spread around your risk.
Investors get a 1.5 step up on the capital invested for the search (assuming a traditional search fund) and return tend to be higher than standard PE funds. Check out the Stanford Search fund study for more info on them
You’re not going to know enough to effectively execute
I understand there is a massive learning curve, however simply working and learning from the failures is a good base point. Additionally, I have interned at startups, and have started my own small business which has provided me with a bit of real world experience.
You can work and learn from failures on someone else's dime, while making an income, by taking a PE gig. Or you can work and learn from failures while burning your own savings and making no income.
What’s the kid need to learn to execute effectively ?
Exactly...deal processing is not rocket science. Takes a bit time to get familiar with the documents but that's really it.
you should work in LMM at a LCOL city, see how you feel about buying one of the businesses yourself
OP, It really depends on you. Most of the comments above are pure employee culture and thinking. If that appeals to you, stick with the herd and follow their well-worn path. If the idea of being nothing more than an employee makes you ill, then you probably need to look at doing your own thing. Spinning up from a small LBO into a nice portfolio or just a bunch of flips is a perfectly sensible path but very few do it.
Running a business is not nearly as easy as people on this forum seem to think, especially when it doesn't have a real management team in place.
You'll almost definitely end up working way harder, with more personal risk and lower yearly take home. Unless you're REALLY into it and have a good shot at making over $500k a yr don't do it IMO. It's just not worth the stress or headache.
Your business can be wiped out overnight or you get shit on repeatedly. You need to be aiming for real money (IMO $1M+) for it to be worth it because of the below...
IE: -Bigboi with a thicc warchest comes after you legally and you burn $200k - $500k on legal. There goes your take home.
-Supplier fucks up, you miss Black Friday and you have a seasonal business. Enjoy a year of fucked cash flow.
-Google updates their search algorithm and suddenly your most efficient customer acquisition channel tanks and you're bleeding money. This happen to a co I nearly bought. Went from $1.3M EBITDA or so down to bleeding cash. Fun.
-A platform like Facebook changes advertising rules and your product CPM skyrockets making paid channels ineffective. Upside down again, woo.
-Random employee sues you for literally no reason and you settle because it's cheaper to settle/not worth your time + legal costs.
Blah blah blah....
If you can deal with that, then yeah, go for it. But never start a business or buy one aiming to net out less than at least $500k (more like $1M though).
This is the absolute truth here. I ran a LMM business and each of these points are so spot on that it brings on PTSD.
edit:
Sorry to revive a prehistoric thread but what exactly changed with the Google algorithm that caused that EBITDA nosedive? Were they dumping 100% of marketing spend solely into a single Google campaign?
Why not do a stint in LMM PE and then try to buy a business? You'll have more savings plus you'll atleast gain some sort of operational knowledge depending on the PE fund.
I’ve been considering that lately, and will probably go down that route.
If you want to do your own small LBO / fundless sponsor deal, this is the way to go. Directly relevant experience plus you should begin to develop your own deal flow, target lists, contacts, investment theses, etc....you know all the stuff you need in place to execute on one of these opportunities.
If you believe you have the operational chops, working for a buy-side LMM banker will get you lots of deal exposure and you can probably find one for yourself while getting paid to find others.
Or directly source for them and be plugged into their flow + get first dips on everything.
If really considering buying / operating a business, read "The E Myth - Why Most Businesses Fail and What You Can Do About It" by Gerber. Quick read and fascinating story style. Walks you through the difference between:
Most never get past the employee phaze. They're just working for themselves and have essentially created a job with very little future.
Being an entrpreneur isn't a class you take or a certificate you earn. It's about vision, leadership, execution, and proper use of resources.
It's about working "on your business, not in your business". Don't do it because you want to get away from something, but rather because you want to move towards something.
M1 and Jobless - great comments and spot-on. Dead accurate and the complete opposite of the pop-culture entrepreneurial Rah-rah! bullshit.
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