Would you buy higher EBITDA or better management? - Searchfunder

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by a searcher from San Francisco State University
in Los Angeles, CA, USA

2h ago

Would you buy higher EBITDA or better management?

Question for those who have bought founder-led service businesses: I was a self-funded searcher, lurking on SearchFunder soaking up info, about 18 months ago and bought a luxury residential electrical and low-voltage contractor in Southern California with an SBA loan. The first six months were pretty rough - everything you could think of... message me if you like horror stories. Since then we’ve grown the business significantly. We’re now on a little over a $6M revenue run rate with abnormally high margins (teaser)… we’ve added several key builder relationships and our backlog is the strongest it’s been. The question: are we entering that messy middle ground between being a typical self-funded acquisition target and something that starts to look more attractive to institutional buyers? And what does this mean re how to build the business from here? Today I still do a lot - so owner earnings are very high. We could hire an experienced GM or COO, which would reduce EBITDA in the short term but make the business less dependent on me and maybe easier to hand off? For those who’ve been through this - IF the goal was to go to market soon: - At roughly what size should I start investing for transferability instead of maximizing current cash flow? - Is it worth making an investment in mgmt layer before a sale, or would buyers rather buy the higher-earning business and build that layer themself? - Does th decrease in EBITDA ever yield a high enough multiple increase to make enterprise value + sell-ability more valuable? There isn’t a right answer here, and I’m sure it depends on the buyer. I’m just trying to understand whether I’d be creating value or simply moving dollars from EBITDA into payroll (chasing higher multiples) I’d appreciate any perspective from either side of this decision… thanks!

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reply by a professional 17m ago
in USA

I'll do my best to answer this from the perspective of someone that's lived this exact question and the lessons I learned afterwards, but the honest answer is that you should do what feels correct for you depending on your own goals and timelines. - At roughly what size should I start investing for transferability instead of maximizing current cash flow? Highly dependent on your market and your timeline. If you are in a market with strong multiples and high demand- the payoff may be smaller on an investment in transferability. If you don't have a strict timeline and you want to maximize the likelihood of a successful exit- investing in transferability has a higher potential payoff. If you foresee a difficult year or downturn in the near future, timing is more important. This is just framing to help think through what you really want. - Is it worth making an investment in mgmt layer before a sale, or would buyers rather buy the higher-earning business and build that layer themself? Depends on the buyer and what they are looking for (which you know). Most of the time PE loves to build the layer themselves- but they will account for that in the final transaction size and may ask that you stay on for longer to ensure a smooth transition. If you have a few years, aren't in a rush, and have plenty of headroom for growth- then building a management layer can definitely payoff. But, do you want to go through that or not? It's sneakily difficult to build a management layer that pays off if you've not done it. Hiring someone that has done it can be the right move but again it depends on your own goals and timing. - Does th decrease in EBITDA ever yield a high enough multiple increase to make enterprise value + sell-ability more valuable? Not quickly. Again, if you have a few years and want to commit then the payoff is in growing the top-line + a smooth transaction. There are two competing goals to consider: Closing the sale and maximizing the payout. If you can't do the first, the second isn't as important. Lastly, there is a middle way- hiring a fractional resource with experience, even for a short time can yield strong results. Just make sure the incentives are aligned and you've got the right person with a clear mandate.

reply by a searcher 14m ago
from University of California, Berkeley in San Francisco, CA, USA

Yes. I tend to grasp easy concepts. So when I think about multiples range within similar sized/businesses, a higher multiple is a proxy for higher certainty that past financial results will translate into future outcomes. I would caution though a market multiple does not guarantee the asset meets your risk-adjusted internal hurdles.

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