self fund vs equity partners?

searcher profile

August 03, 2018

by a searcher from Texas A&M University in Odessa, TX, USA

I have looked at roughly 50 businesses that are for sale in the area that I live in. I have seen lots of businesses with growth potential that are currently in the $1 to $2 million EBITA range. The owners typically want a 5-7x multiple which is out of my price range to self fund. I am curious if anyone has any experience with purchasing a business with equity partners versus purchasing a smaller business that is self funded or self/debt funded. Any replies or suggested reading would be appreciated.

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commentor profile
Reply by a lender
in Yorba Linda, CA, USA
As a lender, the deals that I see getting done are between###-###-#### x for companies with EBITDA ranging from $500,000 to $1,500,000. With 10% down and a 15% seller note, and a 10 year SBA loan for 75% of the purchase price, the deals will work from a lender perspective.

Also, we do not recommend the 5% down with 5% seller carry on 10 year standby, with 90% SBA financing for search funds. We only utilize that structure for key manager buyouts where the manager is getting a price that is below market (which makes up for the lack of equity of seller carry). For 3rd party buyers, 10% down and 15% seller note is the best way to ensure success, at least from a financing perspective.
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Reply by a searcher
from Arizona State University in Phoenix, AZ 85004, USA
We've looked quite a bit in this EBITDA range and I would seriously question that multiple range unless there are incredibly compelling reasons to pay it (and believe investors and lenders would say the same thing).

The issue you'll have is most banks on smaller EBITDA deals aren't going to want to see funded-debt to EBITDA ratios north of###-###-#### and it's hard to get mezz financing on deals this size) so you're going to be forced to raise a large amount of equity capital to bridge the gap (with greater perceived risk given your entry multiple) which will likely impact your personal equity stake in a meaningful way.
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