So you want to buy a business...

Being in M&A, I have always wanted to buy a business (or several) of my own.

Any advice on how to get started in the market?

I feel like most of the "deals" I see are complete dogs.

Comments (14)

Nov 8, 2019

Stanford has great information on search funds that may be pretty useful to you. I know it's not exactly the same but it should help you out.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

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Nov 11, 2019
Malta Monkey:

Stanford has great information on search funds that may be pretty useful to you. I know it's not exactly the same but it should help you out.

Well, this is depressing. I've literally never heard of search funds (apparently the concept was at least publicly described in 1984, according to Stanford?), but I had independently invented this concept a few years ago for small businesses. I've been pitching the idea to anyone who would listen and I've been mostly brushed aside. Apparently, this isn't even close to being a unique idea. Pretty depressing to find out. Should have known though.

Nov 11, 2019

On the flipside, you came up with an idea that Stanford GSB has coined as their own innovation. Meaning your thought process is the same as the (subjectively) most qualified minds out there.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

Most Helpful
Nov 8, 2019

One thing to consider, unless you have a large wallet or are going with the search fund model/IS...

Buying a business with under ~$2M/$3M in EBITDA isn't really good for someone with an M&A skill set because there isn't enough middle management or cash to play with to hire good talent. It's often the entrepreneur picking up skills and building a duct tape solution.

The problem with deals with $2M+ in EBITDA though is that you're stuck competing with a ton of PE firms, search funds, etc...

As far as deal flow goes...we comb through the internet using three separate data sources - Alexa + BuiltWith + SEMRush - and use that data to build out a list of potential targets. A data miner pulls their # and email address, then we automatically email them to set up a time to chat and start serving them ads to get them to reach out. It's worked really well so far. There's a bit more to it than I described of course but I don't like handing out my complete secret sauce recipe. ;)

Nov 11, 2019

That's a good post ! I assume you are interested exclusively in online businesses otherwise I don't understand why are you using alexa, buildwith, etc. Do you run a PE fund or a business brokerage ?

Nov 9, 2019

Start a search fund, create very ambitious but at the same time ambiguous business plan that you use to pitch potential investors with. Pull in roughly 500k-2m initial funds for the "search" from either dumb people and family who lack the skills to invest on there own or smart busy people who lack the time.

While bringing in the initial funds for the search phase have everyone sign a letter of intent saying they are prepared to invest 10X more in equity when a suitable acquisition is found.

Then the search begins, find a company that is promising but being run in a inefficient way, family businesses etc with lots of unnecessary expenses. Then send a expression of interest to attempt to obtain financials for the business, if they accept issue a LOI to purchase. Go to the bank to obtain sufficient financing 65-35 debt to equity, leverage is how you'll make you bones.

If you can purchase and turn the company around while drawing a salary, sell the company in 3-5 years and take 20% of the profit as your slice.

This is obviously a dumbed down version but you get the picture.

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Funniest
Nov 9, 2019

Tell us something we don't know, thanks.

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Nov 11, 2019

Username checks out.

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Nov 9, 2019

This book is a good resource - Harvard Business Review: Guide to Buying a Small Business

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Nov 10, 2019
ke18sb:

This book is a good resource - Harvard Business Review: Guide to Buying a Small Business

This 100%. Especially coming from an M&A background, it will help you shake off the corporate M&A perspective and will refit you with a better lens as you're looking for a potential deal and evaluating them. I attended one of his lectures once on entrepreneurship through investing at HBS, and ended up deciding to go into PE as a result because of how fascinating I found his thought process.

Edit: The Author, Richard S. Ruback, has some great 40m+ lectures on YouTube, Would highly recommend them, Basically encapsulate the lessons in the book

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Nov 11, 2019

I can give you a little suggestion on starting up a consulting firm for real estate and property taxes. People are in need of these two essential things and hope this idea helps! All the best for your new business prospects!

Nov 11, 2019

I quit my PE job and have been actively chasing deals in the $300K - $2M EBITDA range in a specific market sector. If you want decent deals you need to contact entrepreneurs directly, brokered deals get looked at by way too many people. You need to be contacting 50-100 companies a week to for a while before finding anything decent - @m_1 has the right idea, ive been using similar techniques. It takes thick skin, you need to source your own deals and pay your own deal fees. The travel bills and legal bills rack up pretty fast when your paying from your own pocket.

I recently closed my first deal and it took a full 18months of searching / meeting entrepreneurs before finding a deal that made sense.

This is not something you can do on the side. You have to do it full time, if you want any chance of actually closing anything. Feel free to PM if you want some advice.

Also, your M&A skillset is somewhat useful, but its mostly a sales job. Don't expect to be building any type of complex models and dont expect anyone to respect what you are trying to do and especially dont expect the entrepreneurs to give a shit about the school you went to or the firms you worked at. As soon as you leave your firm you are basically seen as "unemployed" by your peers. Also, expect that most of these deals will be outside of the city so you are goin to be dealing with lots of blue collar / small town folks. The deals in the city tend to trade at a premium or have thinner margins due to higher rent prices.

In terms of analytical work - it typically comes down to calculating EBITDA, validating some adjustments / normalization and then slapping a multiple and trying to convince the entrepreneur to sell most of it in VTB / Seller financing. You will also look at the client concentration risk / quality of revenue (i.e. how much is repeat/recurring vs contract type work).Typically I look for deals around 5x where the entrepreneur is willing to leave 1.5-2x on the table to be paid via VTB/Earnout after 2-3 years. This allows me to pay 3x at close and use ~2.5x of bank debt.. so I don't need to put up too much equity.

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Nov 11, 2019

Now that you are closed - are you going to be the operator - or are you outsourcing that side of it to a partner/someone you hire and then you'll resume the ongoing search for new opportunities?

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Nov 11, 2019
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