Do Traditional Searchfund Investors Prefer Businesses at lower multiples that "Needs Fixing"?
April 14, 2021
by a searcher from New York University in Los Angeles, CA, USA
Do your investors prefer you to find a business that "needs fixing" that trades for a lower multiple or one that needs no fixing but just has an owner who is passive/doesn't want to work hard anymore to grow it?
I know self-funded searchers like businesses that "need fixing" that they can pay 3-4x for. In either case, we're all likely first-time operators so probably stay away from "needs fixing?"
Any help or thoughts would be great!
in New York, NY, USA
This provides a spread where they can sell at a multiple many times than what was purchases for. This strategy works just as long as the value is added is what buyers are willing to pay for. It's a bit of a well calculated gamble.
Investors many want safe, steady growth of their investments, especially if the searcher is young and not an experienced operator with a limited track record.
The Beauty is when a searcher can create a marriage of both philosophies. Create value that will make investor wealthier by working with you. Alleviate any fear that their investment isn't in good hands. Especially if this is your first successful deal, I would say maybe just as important is to build a track record and investors will come flocking on your next search journeys to acquire companies. Then afterwards you can take on riskier ventures which would require a turn around, but only after you've gain experience and trust from previous successful exits. Think of it as being only an appetizers in the buffet of acquisitions you will complete 😆
It's very similar to buying a used car. On the market many cars are for sale, many of them need some sort of work to be an operable vehicle. Your goal is to buy a used car that works, not a car that needs work. One that is already operating fine it may need minor repairs such as a headlights cleaned, interior cleaned etc but stay away from any repairs in major systems and components engines, transmissions etc.
Even if it seems like a simple fix sometimes right afterwards something else needs more work. You may end up getting so tied up in all the repairs that you may actually never drive the vehicle and may overspend and sell at a loss. So if a business needs fixing try to figure how long will it take you at the present value.
from Hofstra University in Melville, NY, USA
A self-assessment will help you with some answers IMO.
What is your personal cash position? If its strong and you don't need a salary, you can purchase a business losing money to break even if you feel your skill set can turn it around. I personally would recommend doing those only as Add-ons after you understand the business and have a stable platform. The overhead cuts can be the 'gravy'
As we say in the entrepreneurial world, "What is your super-power?" If it matches the problem you identify in the company then it may be a good fit to pick up a discounted company. For example, way too many business I see have no real Sales system. If its referral based that is one very large issue that you may not want to tackle unless your super power is marketing/sales.
Are you self-funding, bringing on capital partners or using debt to purchase? If the answer is not self-funding, you probably want something more stable. I agree with ^redacted that you should get reclamation projects more on a performance basis. I would offer upside in the event the business performed better then projected.
How familiar are you with the industry? If you haven't been in it before, you just don't know what you don't know. An example is after I sold my technology staffing/consulting company and taking a year off, I looked at many different business. I hired experts in a few pre-purchasing to make sure I knew how to interpret financials and what to look for. I was amazed at how much I had no clue about. And I had the experience of purchasing businesses prior to this. This story is just a long winded way of don't take on a 'fixer-upper' unless you have solid industry experience.