Traditional vs. Self-funded

April 06, 2023
by a searcher from University of British Columbia - Sauder School of Business in Vancouver, BC, Canada
Does it really make sense to wait until you save up the money to do a self-funded search? If it takes another 2-3 years, isn't that a huge opportunity cost? Obviously, you theoretically get more of the business in a self-funded search, but I think there is a lot of value in buying bigger (eg, can potentially hire a new CEO down the road, stay on as chairman, and repeat the whole process with a new biz).
Also, if you buy a bigger business with the right backers, isn't it possible to avoid signing a personal guarantee? eg, for a $3m EBITDA business, you may just get traditional bank financing and, if the bank trusts you and your backers, avoid the PG. Does anyone have any thoughts on this specifically?
from Washington and Lee University in Cambridge, MA, USA
To answer your specific questions, yes, buying bigger with less equity can be more financially profitable than buying smaller with more equity, and by working with some traditional as well as accelerator investors, you can avoid using an SBA loan and instead use a traditional senior or mezz lender.
from University of Auckland in Auckland, New Zealand
I agree with Elizabeth's comments around framing it up in terms of autonomy and risk.
The other part that is important to me in terms of this question is where can I excel and add the most value on a day to day basis? I believe I have some core strengths/capabilities in working within a larger business environment (say###-###-#### staff) and if I go down the self-funded route (say less than 20 employees), I will be punching invoices if the finance person is sick or jumping into the warehouse if I need to. Don't forget that in a smaller business initially you will be much more operational and hands on than you would be in a business generating $3M EBIT+ per year.
Ultimately, this is very contextual based on the target businesses you find and the investors you will potentially partner with, so for me this decision is not the first hurdle (however it may help narrow down my search parameters if I fully committed to one avenue). I have found a smaller business that ticks a lot of boxes that I can self-fund to acquire but continue to look at larger opportunities that would need investor backing (I have obtained verbal investor commitment). I still haven't landed what path I will take.
Happy to have a zoom chat to talk through this if there is any interest! Go well!