Downsides of "buying a job" below 750k+ EBITDA?

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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.

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Reply by a searcher
from The University of Chicago in Nashville, TN, USA
Not all $750K EBITDA companies will be created equally but you don't generally see a company below that with much management in place, meaning that you will be very involved in day-to-day operations. The other downsides are that the transaction costs are fairly similar for $750K EBITDA or $1.5M EBITDA transactions so you might as well go bigger and smaller companies have a statistically higher failure rate. On the positive side, multiples are generally lower, you are avoiding competition with PE, and you may not have to raise investor capital.

The main thing to look out for is the "key man risk" with the owner, there are many smaller companies out there that once the owner leaves with their network and sales experience there isn't much left for the buyer.
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Reply by a searcher
in USA
Lots of good practical takes above, but will add three simple points.

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!!
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