I’ve been toying with the idea of acquiring another small medium business. I’m looking for good small business ideas. My primary reason would be to generate additional capital for growing our wealth. I’d also like a business as an additional form of income.
I’m always looking for new businesses to acquire. Mostly due to my background in private equity.
Choosing a business to acquire is quite straightforward, once you know what you want.
What do I want?
No requirement for me to be working in the business.
Critical is the concept that it won’t require me to be present on a day-to-day basis. Strategic direction is fine but key-man dependency is undesirable.
I may have a role in the organization but I need to be replaceable by another employee with suitable skills. Also I cannot be the CEO/MD since then I’m unable to get out. Succession planning is a real concern in small businesses.
Perhaps while the business is small I could manage them until they reach scale. The plan though needs to be to reach scale as quickly as possible. I would prefer to acquire an existing business to skip the startup phase though.
Cashflow
The business I’d look to acquire would be an existing business that is profitable.
I want to put my capital to good use, hence a business that exhibits good steady margins and cash flow.
It also needs strong cash flow since I will use a portion of bank debt to acquire the business. I need the cash flows to be able to service the debt and also leave enough earnings to make the investment worthwhile.
I would like dividends, not just a large amount of capital upon a sale event.
Reasonable price
Price is incredibly important, since I don’t want to overpay for earnings – especially active earnings – when I could just acquire more listed equities without the hassle of running a business.
Also, I need a margin of safety should the performance of the business not be as good as expected. I’m buying from an insider, who knows the business, and obviously has experienced all its problems.
Therefore, I’ve been looking at businesses with multiples that are in the 2x-6x EBITDA range. That means that their total cost to acquire will be a multiple of their earnings, prior to any debt or taxes that they need to pay. Those multiples will range on the low side if I’m actively involved, to the higher side if it has more management in place.
Ideally, the investment needs to meet a combination of 3 things: enough earnings that it is worth my time to be involved, the right price that I feel confident to risk a chunk of capital and take on debt, and a decent multiple so that I’m not overpaying for the earnings.
If I get those 3 things right, then I can take the plunge and not lose too much should the business not work out. I am buying as an outsider, so I need all the safety mechanisms I can get. It’s different buying a business for yourself as opposed to my old work of acquiring businesses for a private equity fund.
Ultimately if I can tick all the boxes and find good small business ideas. Then it’ll be worth it to deploy some capital. A large amount of the initial work is just talking to brokers and business owners to narrow down my focus area.
There are a significant number of brokers and marketplaces that deal in small businesses to look at. I’d recommend building a pipeline of decent businesses to look at. It will come down to personal relationships with brokers and them assisting you to find what you want.
Hi Charlie,
A really interesting post. I’ve started my own micro business in the past and invested in a couple of startups, both of which didn’t go great but I’ve never considered buying a going concern as I’ve always thought I wouldn’t know how to value it and it would need me to work in the business for a time before I could get somebody else to run it.
I’ve come across people who have done well with Franchises when they wanted “Hands off” business ventures where they don’t have to be heavily involved but that does mean it’s not really your business which is what I sense you’re looking for.
I’ll be really interested to hear how it goes particularly with your background in the private equity space.
Good luck with the search.
Mr H
Thanks MrH!
It’s always been a process of sifting through a large amount of volume, once the mandate/criteria are understood. So I’ll be busy with that for a while.
Even at the funds I worked at we only purchased 1 or 2 businesses a year and that was with a whole team =)
Anyway I’m quite excited to dive deeper into the businesses and their numbers.
Franchises are great for people that want to purchase a new job. I’m not excited about individual franchises due to the restrictions put in place by the franchise group owner and the personal involvement required running a franchise (like on site management). However, being the head office of a group of franchises is great.