Why isn’t this discussed more?

There's are a lot of talk on this site amongst folks who are reaching their limitations with their chosen careers in IB/PE. A lot of them ask for exit advice, what opportunities exist that fit x-y-z criteria, etc., and most of the time the between-the-lines message is that people are looking for something that is fulfilling, allows them to have more control over their lives, and provides good comp/upside. Suggestions are often FP&A, corp banking, or start your own business, but why aren't more people suggesting buying a small, cash-flowing business with value potential through a business broker?

Comments (21)

Dec 7, 2021 - 10:46pm

My phone was being weird and wouldn't let me see the rest of what I was writing so I'll finish here. It just seems like if you have built up a good nest egg, why not put a small portion of your nest egg up against a loan to buy an already existing and cash-flowing business with potential upside? There are a decent amount of mom-and-pop businesses with folks who want to retire, ready to sell. It just seems like an obvious path to take but I rarely see it discussed.

Dec 7, 2021 - 11:38pm

Because people rather put 100 hours into making someone else wealthy instead of sacrificing 70% of that time to fulfill themselves 

Array
  • 1
Dec 10, 2021 - 8:41am

I agree with a lot of the replies that you have already received that focus on the "buy side" but there's also the "sell side" here. I have been offered businesses in the past but the reality is that a lot of owners have some ridiculous expectations for what their business is worth and/or how the transaction should go. This is especially true in the scenario you describe where the owners are on the verge of retirement and want to sell. This population can sometimes believe that "hey, Ive owned this for 20 years, it must be worth millions of dollars!" They don't want to listen to the models that tell them what it's really worth because they've actually been running the business on credit cards for the last 5 years. Or they want to retire now, not 2 years from now, so they offer no transition period for you to learn the business have a successful sale. These offers inevitable put you behind-the-eight-ball from the beginning and are offers that you should ultimately pass on. The truly good businesses for you to buy really don't come up very often on the open market at all (they get inherited, private sale, etc). 

Dec 10, 2021 - 2:05pm

Very true. It's a lot like marriage/dating. The good ones will come when you aren't looking for them. I think the best way to find a business to buy as an individual is to start looking before you might even be ready to make the jump, and observe/learn from the inventory out there until something comes across your desk that's just too hard to not to pass on. Captain Obvious here

  • Intern in IB - Gen
Dec 7, 2021 - 11:04pm

Interesting. Still sounds risky and hard. I guess IB PE people are mostly risk-averse and want guaranteed high comp and prestige. Running a small business doesn't necessarily give that

Most Helpful
Dec 7, 2021 - 11:32pm

From my experiences with LMM PE portco's thus far, these deals are closing at around ~$3-5MM and generating positive TTM cash flow of $300k+ at the close date, inclusive of prior owners' base draw(s). Obviously there are cheaper businesses out there, but those are the numbers I've seen thus far where you could easily, and with low-risk, replace the previous owners with a CEO, a controller (if needed), maybe a sales/marketing person, and take a less hands-on role in the business, while still providing the resources necessary to drive growth and add value. Again, these are businesses that have been operating for 20+ years so the risk of failure is very low. Down case, you scale back the capital-intensive growth initiatives to generate positive cash flow after servicing debt and you're still benefiting from being your own boss, generating good income, and being in control of your own life. As with most deals, it's important to make a well-informed decision on your purchase as timing/pricing can play a pivotal role in the success of the deal, but my over-arching message for this whole piece is that none of this is new to a VP-level individual in PE/IB. This seems extremely transferable, from a skill set perspective, for someone at that level and offers a lot of what folks are asking for.

  • Associate 1 in IB - Cov
Dec 10, 2021 - 11:18am

What types of businesses are you looking at?  Can you give some high level examples?

Dec 10, 2021 - 2:14pm

Given my geography - Oilfield Services, construction/general contractors, etc., highly labor-intensive businesses where high labor costs drive solid margins. Also very scalable businesses when things slow down. Not having to move mountains to reduce the number of crews as they become idle, very little overhead in some cases, COGS are purely driven by active job, etc. Greater utilization of field personnel is in lock-step with better earnings due to high margins.

  • Analyst 2 in AM - FI
Dec 7, 2021 - 11:56pm

A couple unorganized reasons, and this is coming from someone who is involved with doing this:

-The PE/IB skill set is not really as transferable as it seems at the lower level, especially when it comes to operating

-Despite the prevailing thought of "there are a ton of boomers looking to retire and sell their businesses at great prices", that's not as true as most would hope. To find a good business in your preferred geographical region at a favorable price is not easy and not guaranteed.

-The job simply won't be as desirable for most people if you're doing the operating. Going from working front office finance where you wear a suit and work pays for your first class flight tickets making decks and models all day is a world of difference in motivating a blue collar factory worker to put an ounce of effort into his job.

-If you're not doing the operating, you'd have to hire someone else to do it which will cost a lot of money if they're any good, eating away at your returns.

-This is an extremely risky proposition. If you're financing debt at a small scale, you'll most likely have to guarantee the loan, pledging all your other assets. Even if you're buying all cash, unless you have a ton of money, this will be a very large portion of your net worth and, fun fact, businesses fail all the time. Suddenly your income AND investments will be derived from the same thing, unlike having a job separate from your investments which automatically provides diversification.

That being said, I'm all for this route. You just need to know what you're getting into because it's not nearly as easy as it sounds.

Dec 8, 2021 - 12:25am

I definitely agree with you on the operating aspects of it. Dealing with blue collar workers, Heavy construction O&G in my previous experience, is night and day compared to dealing with individuals in finance. Not better, not worse, just very different. Additionally, having to guarantee the debt, which would most likely be required in this case, does greatly increase one's exposure. The risk is there don't get me wrong, but from a risk/reward perspective this seems like a far better option than a trying to start your own business, and yields greater personal control and far more upside than leaving to work for someone else in corp finance or other.

  • Intern in IB-M&A
Dec 8, 2021 - 8:19am

Flipping real estate honestly sounds better. Buy studios, add some trendy, modern furniture and either put them on AirBnB or resell them later. You can even use asset-backed loans which allow you to add little collateral from your own capital, effectively doing a leveraged buyout.

Dec 9, 2021 - 10:55am

In one word, I think it's fear.

Fear of (1) the risk of failure. Feels like taking a massive leap the more you build it up in your head. (2) operating is still a grind, particularly in the first couple years. How transferrable will my skills be? If it's blue collar work, can I relate w a white collar background? What if I can't win over employees and the foundation I thought I was buying starts crumbling?

If you build the fear up enough, sticking w the status quo (and still solid pay. Mmm those bi-weekly checks) feels simpler and easier. Leveling up more passively feels easier than taking such action

Taking this risk should absolutely be discussed and embraced more....

 

 

 

 

  • 2
Dec 10, 2021 - 10:07am

this is regularly discussed on the RE forum. The endgame for a lot of people in development especially, but also on the investment side in REPE, is to do their own projects. Whether that's small-scale commercial, apartments, self-storage, etc.

Dec 10, 2021 - 11:21am

Entrepreneurs have a very specific disposition. Some people do better in roles where they can be deep specialists instead of a jack of all trades. For example, one of my LPs and I make about the same. He's an HF guy at a well know MM and I've gone down the entrepreneurial path. Neither is better than the other...just depends on what your personality is like.

I would probably struggle to enjoy work if I didn't have my NW at-risk and many entrepreneurs are the same way. Most people are the opposite and would not be able to make good decisions with their net worth at-risk. Again, nothing is wrong with that, just need to make sure your approach and work fits your personality.

Dec 10, 2021 - 1:49pm

Because LMM Pe funds are taking all of the deals ….

Array

  • 1
Dec 10, 2021 - 10:48pm

People in high finance have no operational skills to run a business. That's why.

Their skills are 99% very useless and inapplicable to actually growing and running a company. Real business world is very different from Excel modelling and these people are not trained to solve real business problems. 

Easier to move from IB to corp strategy to FP&A than run an actual company.

Dec 17, 2021 - 7:50am

Eveniet odit earum voluptates libero quod autem suscipit. Aut itaque ex iusto vel facere. Culpa et modi qui accusamus quia beatae nihil. Dolore ex nobis minus et. In magni voluptates odio nisi. Corporis nisi iure vel sit et officiis et. Labore quod enim ea sed.

Pariatur necessitatibus delectus dicta id. Eaque non et at est voluptatem impedit nihil quia. Qui et ducimus accusantium accusamus dicta. Sequi praesentium laudantium sed qui non occaecati. Et reprehenderit numquam magni.

Rerum in dolorum aut aut. Aliquam adipisci quas vel omnis quis unde debitis ut. Aliquam et et cum autem soluta doloremque. Eum voluptates quas sint minima et. Tenetur aliquid omnis itaque quae ducimus.

Quia quia sed eos eum. Debitis voluptatem ea qui dolores sunt hic esse nobis. Aut voluptatum vero et eum veritatis unde architecto.

Start Discussion

Total Avg Compensation

January 2022 Private Equity

  • Principal (8) $676
  • Director/MD (18) $575
  • Vice President (73) $365
  • 3rd+ Year Associate (72) $271
  • 2nd Year Associate (148) $255
  • 1st Year Associate (299) $220
  • 3rd+ Year Analyst (26) $159
  • 2nd Year Analyst (66) $134
  • 1st Year Analyst (196) $120
  • Intern/Summer Associate (21) $67
  • Intern/Summer Analyst (230) $59