Which is better - large or small - when buying an existing business?

September 11, 2023

by a searcher from Brigham Young University in Collierville, TN, USA

I am new to the idea of business purchasing and looking to gain perspective on the pros and cons of purchasing a smaller (<$500k EBITDA) or a larger business? Please share any resources, thoughts, perspectives, and experiences.

0 Likes

14 Replies

174 Views

Replies

Reply by a searcher
from The University of Chicago in Chicago, IL, USA

Just one opinion but we prefer deals with at least ~2M of EBITDA. Below are a couple reasons/thoughts. We feel the amount of work that goes into completing a deal or actively managing a company well is largely fixed and intendent of deal size (in other words they are both a lot of work so may as well have larger profit/return potential on time with all future growth opportunities being similar). Another big item for us is we really like to invest in growth and we find this requires substantial free cash flow to do without additional debt or equity injection. Buying large pieces of equipment or hiring key team members can be too large a percentage of free-cash flows for our appetitive when we look at smaller deals.

This is all for platforms though as roll-up/add-on deals have a whole different set of considerations

Reply by an intermediary
from University of Missouri in Kansas City, MO, USA

Paul, that is a simple question with a very complex answer that depends on a broad array of variables. For the most part, smaller deals have greater risk because there is far less margin for error if the business declines or gets hit with significant cost increases or changes in market dynamics, government regulation or competition. Also, cash flow is usually more critical and difficult to manage. If you have access to additional working capital outside of the business, you can mitigate some of this risk to a certain degree. Also, for better or worse, there is less to lose on a smaller business but generally, the upside is not as great in terms of dollars even though on a percentage basis, gains may be greater than on a larger business.

+12 more replies.

Join the discussion