Should I increase my target SDE?

January 06, 2025

by a searcher from Indiana State University in Indianapolis, IN, USA

Recently I was listening to a podcast that challenged my thinking quite a bit. For reference my original target SDE was in the $300K-$500K range as a self funded searcher. Now I'm considering $700K-$1mil range and raising some capital.

The podcast mentioned the idea that going bigger is arguably less risky with more "stable" businesses. The strongest point (for me) was the quote "if either of the options fail, you likely go bankrupt anyway". That struck me haha!

So I wanted to put out feelers on what you all think - Do you agree with that logic? How different is it running companies from those different size ranges? etc.

Thanks in advance!

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Reply by an investor
from New York University in New York, NY, USA

Hi Devyn - Interesting question. I don’t think a business with $700k-$1mm in SDE will necessarily be more “stable” than one in the $300-500k SDE range - it always depends upon the situation. These are all SMEs and are going to present challenges - and you are going to have to pour your energy into the business no matter what. You will generally see higher multiples at the higher range - I don’t think that’s necessarily PE driven but there are just more buyers focused on the $700k-$1mm range (including searchers). The advantage of going bigger is that you as a sponsor will get more bang for your buck - if you get a 3/4/5x outcome down the road, obviously the financial rewards will be greater to you at the higher deal size. If you do a deal that is on the lower end of your lower range, taking a reasonable salary is also going to consume a sizable part of your SDE. Raising outside capital has pluses and minuses. On the plus side - assuming things go well, your personal gains are going to be enhanced because you will get the returns not only on your personal investment, but you will keep some of the upside that your investors are getting. In addition, having supportive investors can be helpful in this journey. On the minus side - raising capital can be a pain. If you have a great deal, are comprehensive in your DD and package the deal well, you will be able to raise capital. But it can be a painful process for some. The other minus of having investors is that, though you will be the one calling the shots and running the business as you see fit, there will be certain selected matters for which you will need investor approval (related party transactions, raising significant incremental debt, etc.). Hope this is helpful and feel free to DM if you want to chat.

Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

As someone who has been advising high quality buyers with 40% in the Indiana market for 18 years, there are businesses that will sell at all levels. But there are many more businesses to go after with much less competition in the lower range you suggested. It is a numbers and timing game, the bigger the net, the more you can catch and then review. Many "Searchers" who try to do it themselves will go through many ups and downs, often stopping marketing when they find one, when if dies (and they all do) they have to start all over. Usually after a few false starts, they quit. I equate looking on your own similar to that of an attorney who gets arrested for a felony, they could represent themselves, but they would have a fool for a client.

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