How Much Equity to Give Up on a Deal?

July 14, 2024

by a searcher from Utah State University - Jon M. Huntsman School of Business in Spokane, WA, USA

I have two main options in my mind for acquiring a business. Is it better to acquire a 250k-500k EBITDA company personally and retain 70% of the equity myself or to acquire a larger company doing 750k - 2 MM EBITDA but only retain 20-35% of the equity? I would love to hear some recommendations and things to consider with this situation.

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Reply by a searcher
from Princeton University in Annandale, Clinton Township, NJ, USA

Bigger almost always better in the small business acquisition world. Here's the rationale: To grow any business, you need good people to help you do it. Let's say you need to hire someone competent, capable, and energetic to tackle some avenue for new growth. In a $500k EBITDA business, you pay someone an $80k salary, and with overhead and benefits they cost $100k all in. You just lost 20% of your EBITDA with one hire, and you don't even know if its the right fit. In a $1mm EBITDA business, you can pay someone $120k base salary, all in cost $150k. Much higher quality candidate. Your hit to EBITDA is 15%. This illustration scales the bigger the business gets. Many other reasons bigger tends to be better (more established, more resilient/redundency in place, etc).

Reply by an intermediary
from California State University, Northridge in California, USA

Its good to be king! If you have the controlling interest in a business, you have the final word on all decisions regarding how the business is run. I think strong leaders will nearly always prefer that. However, for an inexperienced investor, if the business is doing well, the opportunity to go along for the ride in a minority position would afford you the opportunity to learn from the decision makers in place. I would be very careful to try and determine how they wound up in a position where they need your money. In either case, you should have a clear plan for your exit strategy in place from the beginning.

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