Traditional vs. Self-funded

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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?

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Reply by a searcher
from Washington and Lee University in Cambridge, MA, USA
When I think about the different models, I focus on 2 main points: desired level of autonomy vs desired level of risk. With the self funded approach, you maximize your autonomy. You call most, if not all, of the shots, and can choose to have or not have a board, etc. It is all up to you. The downside is that your risk level (in terms of risk of not acquiring a businesses, or, much worse, acquiring the wrong business) increases. The more investors you take on, whether still as a self funded searcher, a traditional searcher, or an accelerated/single sponsor searcher, the lower the risk of acquiring a bad deal becomes, as there are more eyes on the deal, more experience at play, more resources available to cushion a fall. The flip side of this is, with more investors, comes less autonomy. With a traditional search, you are somewhere in the middle -- slightly less autonomy as you need to answer to your investors and your board, along with less risk due to a more structured and resource-available environment. Then you have the accelerator/single-sponsor approach, which maximizes support available, while decreasing some autonomy due to the nature of the structure and any deal guard rails put in place by the fund.

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.
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Reply by a searcher
from University of Auckland in Auckland, New Zealand
Hi all, I am also trying to get to a point where I become fully clear on whether my preference is to buy a smaller business myself or go after a larger business with investors.

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!
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