Paying a manager to run an acquisition (absentee owner)
December 23, 2023
by a searcher from University of Wisconsin - Madison in Chicago, IL, USA
Hey Everyone!
I am very interested in entrepreneurship through acquisition (ETA) and small to midsize businesses (SMBs). I am currently an undergrad; however, I have been thinking a lot about ETA as a potential supplement to a career (with the hope of fully focusing on acquiring SMBs when they are scaling at a healthy rate where I could then quit my full-time job). How common is it for acquirers to bring on a manager to run an acquisition full-time so the acquirer can act as an absentee owner? Additionally, how would one go about finding talent to hire in a niche role like this? Here's an example I found:
I was scrolling through BuyBizSell earlier today and noticed a site preparation enterprise for sale in North Carolina for $1,950,000. The business has gross revenue of $1,660,270 and cash flow of $833,420. Let's say you take out an SBA loan with a downpayment of 10% (195,000 in this case). Let's also assume that you do some creative financing, finding a partner who will pay the down payment and receive 10% equity in the business. Now that the business is acquired (for free), you could then bring on a skilled operator to fully manage the business, allowing you to own the business as an absentee owner. You could pay this operator a base salary of $200k a year + a 20% bonus for the growth that they contribute to cash flow to incentivize them to scale the business (example: if the operator scales cash flow to $ 1,033,000 dollars, they would get a $40k bonus).
Essentially, this cash flow goes from $833,000 - $208,000 (annual debt payment on 10-year SBA loan with a 3% interest rate) - $200k (operator salary) - $83,000 (cash flow attributable to partner w/ 10% equity in the business) - $100k Capex (money put back into the business to help the business scale and improve operations). This leaves us with a cash flow 325,000, not bad for a business that you acquired for free and are running absentee. You would be making $300k a year doing little to nothing, while still being able to work a full-time job (I am sure some work would still have to be put into the business, however, with a full-time operator I would expect it to be light).
The reason I posted this on this forum was to get a sanity check to see if this scenario was realistic to real life. The site has lots of people experienced with SMBs, so I thought it would be the best place to get feedback. I don't see a lot of SMB acquirers hiring an operator to allow them to run the business absentee, so I was just wondering how commonplace this practice was. If anyone has experience hiring an operator to run their business, how did you find that talent? Thanks!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Lenders are also going to require the primary owner to sign a personal guarantee. They typically want to see some sort of assets or support from that guarantee. If you do not have that, they might then want the investor to guarantee.
The only way I think you make something like this work is if you can partner with someone running the business already that wants to take it over and then you bring the equity to the the table. But you are unlikely to own a majority of the company. I would expect the operator would want a lot of the company for the risk and the fact they would likely be required by the lender to guaranty the loan and the investor is probably going to want a lot more because they are taking on all of the equity risk.
We have done deals for buyers that do not have any direct skin in the game, but typically they have experience that offsets that or will be operating the company. If neither of those things exist, it is very hard to do. I hope this helps. Happy to discuss further at redacted Good luck.
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA
Your basic way of thinking about it is correct, but you’ve got some things a bit off. First, you’re way off on SBA rates. Second, if someone else is putting in the money, they’re going to expect you to put in sweat to earn your equity, so the ‘hiring an operator’ isn’t going to be consistent with their expectations, because you’re supposed to be the operator. Otherwise, why do they need you?
Get a good job, learn how to manage people & projects, and save your money for the equity injection. That’s your path.