A bunch of newbie questions
May 22, 2022
by a searcher from Yeshiva University - Sy Syms School of Business in Boca Raton, FL, USA
I'm relatively new here, so hi! I'm a CRE investor who's diversifying into operations businesses. In that vein, I have some questions that are probably really basic but your answers would be greatly appreciated.
1. I'm not looking to be in the operations day-to-day; I want to buy something that has or can have a manager/director in place that is hands on, and s/he'd report to me. What size EBITDA or revenue would be the minimum you'd recommend that I look for to ensure that there is enough cashflow to support this structure?
2. I am open to owning something almost anywhere - but for personal reasons, I'm not willing to move there (see no. 1). Is this doable and difficult, or am I asking for trouble biting off way too much?
3. A company I'm looking at right now is asking for a ~3.5x (to be verified still) - ~1m EBITDA, sale price 3.5m. But he just informed me that there is an additional 3.5m in debt that he wants assumed (an entity sale and not an asset sale). This is an FFE heavy business, so I'm still looking into how reasonable that debt figure is. But my question for you all is - how would debt assumption affect your pricing valuation? Do you refigure the EBITDA multiple to include total enterprise value, and this deal would now be 7x multiple?
4. Does buying a business with RE affect the multiple you'd be willing to be, because you're acquiring more assets, or it doesn't because in the end of the day EBITDA is the same?
5. I've been seeing a lot of talk about boards of directors - is this for people's searchfunds or acquisitions, or both? How large would an acquisition be before you install a board of directors? I guess I just never thought about a 3-4m (or smaller) business having a formal BoD like that.
Any and all feedback is greatly appreciated. Thanks!
from University of Toronto in Buffalo, NY, USA
2. again, depends on your comfort level with existing management & team. If this is a turnaround project, then probably not. But if it's already a high performing team, if you put the right incentives in place, I think it can be done. In general, I think i would err on the side of it's probably going to end badly if you aren't going to be actively involved, especially in the beginning.
3. I would probably look at the FCF the business is expected to generate after applying some assumptions on maintenance capex. From there, you can apply a multiple you feel comfortable with that clears your investment hurdle rate.
4. in general, you should value the RE separately from the business. But there are specific tax advantage for a business that owns both the RE and the underlying business operations. I'd think though that when valuing them.
5. BoD should be there to help you manage/grow your business. If you think you need to setup a formal structure to do this, then go ahead. I think for a single business of this size, probably a bit of an overkill.
from Royal Melbourne Institute of Technology in Sydney NSW, Australia
If the business you are looking at has a lot of heavy vehicles on lease, then the financing of those businesses would already be factored into the expenses...and ultimately the EBITDA of the business. So follow your nose with the multiples, but make sure you investigate the financing arrangements and whether there are balloon payments at the end that could pose a problem. From there just be reasonable and negotiate it.
I think formal boards are often seen as being too onerous for many business owners, but it depends on who owns equity and what the stakeholders want. An advisory board can be a good informal way to get smart people to help you. Either way, you should expect t pay them.