Downsides of "buying a job" below 750k+ EBITDA?
August 23, 2024
by a searcher from Yale University - School of Management in Los Angeles, CA, USA
I have read and seen many deals that float higher than 750k+ EBITDA range and would love to understand more on the risks of buying anything smaller than that.
This is assuming multiple floats around 3x EBITDA. I get it is more of a "job" once you buy a company in the lower range but if lets say I am buying a 500k ebitda business at 1.5m, and when I pay loans per year, let's estimate 200k, its still net profiting around 180k after taxes. Obviously math is not that simple but I would love to know your thoughts.
from Yale University in Seattle, WA, USA
1- Ask yourself why you are doing this? Are you excited about operating and becoming an industry expert and managing a team, or are you excited to call yourself “an investor” and connect with lots of different folks across industries and spend time on strategy and scaling? So many folks in ETA actually want to be investors vs owners. Pick your horse accordingly. Many folks say spending time “in the business” is a negative, yet many folks are very fulfilled doing this. Don’t let SMB Twitter influence your vision.
2- Remember that investors are successful often because they have a large enough portfolio that they can pick poorly a few times if they pick well sometimes. Do you have the kind of capital to act like an investor right now? Do you want to essentially work “for” people that do? If not, then you need to put your investor mindset on hold until you have enough to take that approach, and it might just take longer than you thought and has headwinds.
3 - Even folks I know who exited after 5-7 years as traditional searchers to great positive results still worked their BUTTS off and would admit they had a lot of luck on their side.
As with everything: Be self-aware, be willing to work hard, and be patient. Life contains many chapters!!
from Adam Mickiewicz University of Poznan in Milano MI, Italia
- a deal under 750KUSD is not always bad, depends on the company. I have evaluated many companies with reliable recurring revenues. Generally there is not much overhead in these companies beside owner salary. I have seen (especially in Italy) business of 2-3MUSD with salary of the owner in the range of 500kUSD, resulting in ebitda maybe of 250kUSD.
- Clearly the growth and effort is higher to arrive to 15 mUSD and try to resell to PE. But on the other side it gives more freedom vs a well established large company
- To buy a 750kUSD is better not to use the search fund model, as you would need 1-2MUSD max, you can dilute way easier between equity, seller note, debt and earnout
- Generally these company are small due to their owner that wants in that way, so you would need to be super operative.
- Returns can be way better vs to any other existing model, if you are able to bring to another level the company. Many think that salary is a constraint, as you won't pay yourself much. My answer to that is, yes, you would expect to earn less than other type of company, but the upside is that you would earn more with equity if all go well. Anyway if the salary is the problem, probably the mindset need to be changed (with a salary you will never get "rich")
Hope this helps