Business Buyers come in all sizes and shapes. There can corporate buyers, individual buyers, partner buyers, management buyers and most commonly first time buyers. First time buyers don’t usually know what kind of business they are looking for nor how to go about the process of finding, evaluating, negotiating and closing a purchase of a business.
Assuming the buyer knows himself and knows what kind of career and salary he is looking for, an efficient determination of the type of business he should target can be a quick decision. But it isn’t as simple as picking a storefront, a gas station or a restaurant. True entrepreneurs that can handle long days and constant micro-management may well be suited to the smallest of small businesses to buy.
But a major segment of business buyers cannot see themselves running local main street businesses. I sure couldn’t when I started out buying businesses. So what is it we are looking for in a business?
The next level up from main street is what I call a “real” business or one with enough staff and sales to take care of itself should any one employee leave or otherwise become unavailable. In effect, can the business “run itself” without the owner being involved? If the answer is yes then it is not only a real business but it can be classified other ways, such as an investment, or absentee business, or even my favorite term, leveraged buyout or LBO.
An LBO is simply a buyout that uses financing of any sort based on the strength of the balance sheet and asset base. It can include one form of financing or many, and use lenders, investors and the seller. This puts many main street and service businesses out of that category as they have no strength in their balance sheets. But if a business can be bought using an LBO structure then this by itself would qualify the business as a viable candidate for most small business buyers to consider. Indeed it may be easier for the business buyer to complete and LBO on a slightly larger company than try to scrape up money for a smaller one without the benefit of any financing.
To provide some real world examples on this framework, I would establish a reasonable sales and profit range of a typical LBO candidate that would be a level up from main street but well underneath the radar of larger buyers and private equity. This range could be in the $2 Million plus in sales and $250,000 plus in profits range which is arguably the minimum size of a leveraged buyout.
This lowest range includes the largest universe of businesses to buy without dipping into a business size which is too small to allow the buyer to breathe or too weak to be financed. The perfect LBO candidate will have enough assets retained in the business to approximately cover the down payment for the purchase. This is when the buyer will know the deal is the right size. However there is no magic deal size and even sales of as low as $1.0 Million or below can generate substantial cash flow and great salaries for most buyers.
At the other end of the spectrum, companies with well over $1.0 Million if profits will be typically out of reach for the first time buyer since the deal will likely require a lot of invested capital. There is, however, a sweet spot at the lower end where small buyers can do some quick math and determine that the capital needed for the deal won’t break their budget.
As first time buyers go through a buyout or two the deal size can easily change. They may well be able to get to the next level and be able to structure larger buyouts and raise substantial amounts of capital to complete subsequent deals.