Why debt is considered good in the acquisition space? - Searchfunder

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by a searcher from INCAE
in Miami, FL, USA

7mos ago

Why debt is considered good in the acquisition space?

I am embarking on the process of acquiring a business. Throughout my life, I have maintained a debt-free existence, even successfully paying off my mortgage ahead of schedule despite a 2.85% interest rate, driven by my commitment to avoid debt and only purchase what I can afford outright.
However, as I pursue this new endeavor, I find myself with conflicting perspectives on the optimal approach. I have accumulated sufficient capital to cover the down payment for the maximum SBA loan of $5 MM without needing external investors, enabling the acquisition of a business with profitability substantial enough to justify transitioning from my current W-2 employment.
Concurrently, I am evaluating whether this is the most appropriate strategy, or if a more modest initial venture would be preferable. The latter option presents a significant drawback, as the smaller scale of such a business would entail a considerable opportunity cost relative to my current W-2 income.
My objective in acquiring this first business is to achieve financial independence within a few years and realize my aspiration of independently shaping my future.
Have others encountered similar dilemmas in their entrepreneurial journeys?

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reply by a professional-advisory 7mos ago
from University of Missouri in Leawood, KS, USA

This is a great topic! To answer your original question directly, debt is popular in the acquiring space because it’s basically a necessity. Mostredactedsomethings don’t have the liquid assets needed to acquire a business worth several million dollars and even if they did, there's potentially significant tax consequences to raising cash & entirely self-funding an acquisition. That basically leaves the options of taking on debt to maintain ownership, or finding investors but losing ownership in the process. This has already been mentioned but it bears repeating that when you look at any investment, there’s always an element of risk vs. return (risk is the aspect that’s often under-discussed). Debt by it’s nature can increase risk, but also opens the possibility of higher returns. At the same time, risk also creates an environment where unforeseen constraints on cashflow can trip you up. Things like economic shifts, regulatory changes, legal challenges, or even a couple of bad Google reviews are all things that may be completely outside your control, but may hinder your ability to generate revenue, meet debt service & operate the business. In the end, debt is a means to an end & how much of it you use, whether to acquire or operate a business, depends a lot on your appetite for risk and comfortability with risk.

reply by a professional 7mos ago
from York University in Toronto, ON, Canada

My two cents: - Max leverage is a bad idea (have to build in a margin of safety in case there's a slowdown, emergency, unforeseen circumstance. etc) - A personal guarantee of the loan means everything will be on the line so because the risk is high, again best not to max leverage and build in a cushion - What I respectfully think is missing from a lot of the comments is that things like maximizing return on investment and other financial metrics are more important for a private equity buyer than a solo buyer / owner-operator whose neck, livelihood, and family's well-being will be on the line if things don't work out. That's a completely different situation than a PE buyer who is trying to hit thresholds for a fund and LPs

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