Competing for the best businesses against Private Equity Funds

Today, I’m sharing a story about a viewer in Chicago who’s struggling to buy a business with around $500,000 in EBITDA. This tale might just resonate with many of you looking to make a similar move. https://youtu.be/L-muWEy2Y1E 

The Struggle of Competing Against Bigger Fish

Our Chicago friend, a retired C-level executive with a substantial budget, is looking for a solid business to purchase and grow. However, he’s finding himself constantly outbid by competitors with deeper pockets. Why? It’s all about the magic of the $500K EBITDA mark.

The Magic Threshold

At $500K EBITDA, a business becomes highly attractive to both Private Investment Groups (PIGs) and Private Equity Groups (PEGs). These entities have the resources to transform such businesses into larger, more valuable enterprises. Here’s how they do it:

1. Target Industry Segmentation: They focus on industries with many independent operators.

2. Strategic Acquisition: They buy a successful business and pour resources into rebranding and marketing.

3. Expansion: They acquire similar businesses within the same media market, creating a chain.

4. Scaling: They grow the business from $500K EBITDA to several million dollars.

5. Exit Strategy: They sell the aggregated businesses at a much higher multiple or take it public.

Why Strategic Buyers Have the Edge

Strategic buyers are willing to pay more because they’re not just buying current cash flow—they’re buying future growth potential. They can afford to offer higher prices because:

• They can spread marketing and operational costs across multiple businesses.

• They’re aiming to sell at higher multiples typical in the stock market (8-15 times earnings) compared to the small business market (3-4 times earnings).

What This Means for Individual Buyers

For individual buyers like our Chicago friend, competing against these strategic buyers is tough. Here’s my advice:

1. Look for Smaller Targets: Focus on businesses just below the $500K EBITDA mark. These are less likely to attract PIGs and PEGs.

2. Build to Sell: Find a solid business, grow it, and then sell it to a PIG or PEG once it hits that magic EBITDA threshold.

Conclusion

Navigating the business buying landscape can be challenging, especially when competing with well-funded investment groups. However, by adjusting your strategy and targeting slightly smaller businesses, you can find valuable opportunities and potentially sell at a profit in the future. www.DavidCBarnettList.com  

Cheers!

David C. Barnett