Here is a problem I see a lot. A first time buyer is not sure whether he should go big or small when he buys his first company. He doesn’t know what he should be looking for. The first impulse is to raise capital and buy something at the $10-$20 Million level. Let’s define this as a big deal although we know there are much bigger ones out there.. Now I have been down this road many times and had to go back to square one because I did not have my head in the right place. What does it take to buy a big deal at this level? Let me explain it.
- First, you have to source the big deals. This means you need to have enough credibility to get in the door and obtain the offering documents. This by itself is a more difficult process at the higher level because the gatekeepers (brokers) are tougher on the screening. You will often be interrogated to make sure you can pull the deal off. Now I have been through this process many times and can safely say this is exponentially more tedious at the $100 Million sales level than at the $10 Million level. At $10 Million you can usually get in the door without much problem and at least look at the deal.
- Second you have to get an agreement and a signed LOI. This is hard enough at the small level but with a larger deal you have more money out there chasing it and the competition is usually pretty stiff. Again this is exponentially more difficult at a certain threshold, say at $2.0 Million in EBITDA when private equity gets interested and starts bidding against the smaller players.
- Third, in order to get this far you will need to LOOK like a private equity player, assemble a team, create a branded image, even raise some capital and be familiar with the PE lingo. If you get past the gatekeeper and get your LOI you now have to finance the deal. This can get pretty complex at the $10-$20 Million level so you need to know exactly how much debt and equity you will need. And even that will be a moving target as you get closer to closing. So you need to have a good idea or your financing sources and equity needs and have them lined up ahead of time.
Anyway not to throw water on your plans but I usually coach folks to go smaller at the outset. More like $1.0 Million to $5.0 Million in sales. Despite people telling you that it is just as much work to put a small deal together as a large deal, it isn’t. It can be exponentially(there’s that word again) more work to put a larger deal together. I am in favor of buying small and building out. The risks are less, the financing is easier and the odd are much more in your favor. Moreover the universe of deals to choose from at the small level is exponentially greater than chasing big deals that are fewer and farther between. There is plenty of time to do larger deals down the road and the smaller ones will give you critical hands on management experience when you start out that will be helpful in all future dealmaking.