Q: Why buy a small business? A: Because it’s easier than buying a large one.
No matter what they tell you, doing a small deal is easier than doing a large deal. But with a Mini LBO structure we can buy a much larger deal than we otherwise could with the same amount of cash outlay. The “Mini LBO” or small leveraged buyout, can be done at any level with any company even though it is used so thoroughly by large investors and private equity firms. It is essentially a suite of financial techniques which enable the potential buyer of a company to leverage a small amount of money and combine it with conventional financing and seller financing to acquire a substantial company.
Most prospective business buyers know two key things: 1) they want an income stream. Actually, they want the biggest possible income stream; and 2) they have a limited amount of cash to buy that income stream. In most cases if somebody asked them how much cash they had to invest, they would not even know and would hesitate to answer. In the final analysis, if confined to his ready savings, the most a buyer could get is a retail store on main street. Nothing against retail stores on main street, they are bought all the time and successfully. The downside is they tend to max out at a few hundred thousand in sales and have a high failure rate. Moreover, the buyer is usually stuck there and never gets a day off.
The world of LBO’s is much more flexible than that. Our business model opens doors in many directions. Using the Mini LBO model a buyer can increase his investable cash, increase his borrowing, increase his target deal size, massively increase his return on investment, to name just a few of the advantages. The LBO strategy is no longer available only to the largest private equity groups. Mini LBOs are available to small as well as large companies, in particular, undercapitalized small businesses, executives and individual entrepreneurs.
Here are five key benefits that the Mini LBO will afford the prospective buyer.
- Enable the buyer to target larger companies and complete deals with far less cash than would be otherwise be possible by leveraging the target company asset base and financing the down payment coupled with judicious use of seller financing. This structure will attract more lenders, investors and participants in the deal.
- Will enable buyer acquire a company with financial strength so that he can draw a substantial salary and benefits and participate in the future profits, bonuses and distributions.
- Will enable the buyer to acquire a scalable company with critical mass and favorable growth prospects. The smaller the company the less it can grow. Especially main street companies which really can’t grow beyond their own town. The larger leveraged buyout candidate will able to grow organically in its core market as well as having the ability to expand in other markets.
- Can lead to the acquisition of a “platform” company for future expansion and empire building. A platform company is one that is substantial enough to attract other potential acquisitions in the same industry and provide for external expansion geographically and vertically into new markets.
- Enables buyer to step back from day to day management of the acquisition, which frees up time and resources to pursue strategic goals in building the business. Perhaps the biggest single advantage as it simultaneously allows the buyer to have a lifestyle business yet develop opportunities, investments and deals in many different areas.
Thus there are many reasons to use a Mini LBO versus trying to get by with a smaller company. The point is that those first time buyers trying to pull the trigger on a purchase of a small business should consider the optimum size and strength of the companies they are considering. Going too small will not help you in the long run. My suggestion for a desirable company would be in the $2-5.0 Million range in sales. This range is big enough to be considered a real company but not too big to involve too many layers of debt.