Investing In Small Businesses
Not sure if this is the right place for this, but I’ve found a local business or two that I want to take a stake in.
My background is in investment banking and have really been contemplating pulling the trigger on investing in/taking small stakes in small businesses with my own capital and acting a silent owner that is relatively non-existent as it concerns daytoday operations.
If there’s anyone in this thread that has done this, how did you successfully do so?
I’m imagining there would be some sort of initial outreach and some follow up calls over a designated period on my end where I would 1) pitch whoever calls the shots at said business 2) learn more about the company/founder and 3) propose my idea
If all goes well and all parties are on the same page, I’d imagine next steps would be some sort of diligence phase where I could examine financials/etc. more deeply.
What I’m trying to determine is, how are economics of the deal structured (I know it’s case by case of course)? Let’s say I invest $10,000 and assume that this is 10% of the company (to use easy numbers) and exit in 5-7 years. Let’s also assume at the end of those 5-7 years the company grows to $1 million and I exit at that point - is it ridiculous to include terms in some sort of agreement that I make $100,000 since the business grew 10x?
Are these terms realistic/not typical?
I know this is a lot to unpack and happy to hop on a call and talk offline if easier.
Thanks in advance for any assistance.
You might find Search Fund resources quite useful for the strategy you are thinking about. I think there is a book (by Harvard on Buying a Small Business) and networks that you can tap into.
My guess is that biggest issue will be the time it takes to find a) a business you are willing to invest in, b) the shareholder to agree to sell down to you and c) for you trust him/her.
In terms of 10% shareholding growing by 10x if the company does the same (all else being equal), you don’t need to cut a special deal, that is just what your shares would be worth - unless I missed something in your question.
There are quite a few threads about small businesses like laundromats, c stores, gas stations, small business startups, etc - just use the search function and you should see a lot.
I have previously invested in small businesses and held equity from 25% to 100%.
1) Analyzing a small business is different than doing this on a larger scale within IB/PE. You learn the steps and processes, but the gritty details of a small business will be unknown to most investors. Unless they are very knowledgeable in that space or have operated a similar business before.
2) Contacting and working with small business operators is fairly easy, most react friendly to phone calls or emails. Especially if you make a fair offer, I don't think they would be offended at all. I have done this previously and most said they were waiting for this opportunity and that barely anyone reached out before. This was in the small retail space, i.e. c store, gas station, laundromat, hobby store, ...
Due diligence is a bit different to larger scale deals, you'd most likely physically go to the business and check equipment, foot fall, meter readings, mystery shopping or anything else you like.
3) While holding equity in a small business is fine, the value of such equity only exists if an exit is possible at all. Either the other owners have to buy you out at the end (most likely at a discount), or you need to find a buyer who is willing to pay the premium for your share. In rare cases the entire business gets sold. Finding someone who wants to own, say, 15% in a gas station might not be that easy.
4) Find out early in the process how much the business requires in follow up investments and how you'd be part of that. i.e. a laundromat requires ongoing maintenance, repair and overhaul of washing machines and dryers. If you own 10% equity stake, does it mean you'd also own 10% of all MRO fees? What about everything else?
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