Build reserves and then buy a business or go straight to buy a business

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December 17, 2024

by a searcher from The University of Texas at El Paso - College of Business Administration in Austin, TX, USA

Want your honest opinions!!!

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Reply by a searcher
from University of Texas at Austin in Austin, TX, USA
Opinions are very split on this. But you can really go both ways. The traditional search fund model can be set up so you put nothing down, but in general your investors will want to see some skin in the game. If you go the self-funded route with either investors or SBA, they will typically want to see a 2.5% down payment, but some banks do allow sellers to provide the equity infusion as a 2-yr stand-by seller note. If you are creative enough, there is no reason why you can't pull it off. But generally most people have some reserves.

Where reserves really seem to help is post-acquisition. Working capital tends to be a huge point of contention for buyers and sellers, and having reserves can really help smooth things over during negotiations. Not to mention, if the business is going through a rough patch, reserves can definitely help you ride the waves. That being said, lines of credit and working capital reserves can serve a similar purpose.

The third factor to consider is time-to-start. Building up solid reserves can take 1-3 years, so that would stack on top of the 2 yr avg search time. This is a big (and often overlooked) factor. The counterargument to this is lack of experience. But the reality is that most searchers have quite limited experience at best, so really taking the extra time to get work experience is not going to be significantly reductive of any potential risk unless you land a grand slam opportunity.
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
It depends on your personality and risk tolerance. If you are a risk it all kind of person, and are ok with boom and bust, then perhaps earlier. But if you are more moderate, then build some reserves, not only for the business (a missed customer payment, a late delivery, etc, won't change the fact that you'll need to make payroll on Friday) but also for your personal life (an AC unit or transmission for example, can run you $5k to $10k). And while building reserves, get some good work experience. Sellers are very hesitant, and rightly so, to provide much seller finance to a buyer without capital or experience, so don't count on an owner of a good business providing too much in that category without either of those two.
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