#6 | Is Buying a “Big” Small Business Less Risky?

Most of the advice I see on Twitter and LinkedIn says that you should look to buy a business with over $1 million in seller’s discretionary earnings (SDE) because it will be less risky than buying a much smaller business. I guess the argument is that a larger business would likely have a team and processes in place whereas a smaller business might rely quite heavily on the business owner.

Another reason that people seem to say buying a larger business makes sense is if you are going to use an SBA loan to acquire the business, you are going to have to personally guarantee the loan which means the worst-case scenario is personal bankruptcy if you can’t repay the loan. So the argument is that if the downside is the same (personal bankruptcy) for a smaller business and a larger business, then you might as well buy the largest business that you can because that is where the most upside exists and the downside is the same.

For me, it just doesn’t feel right.

I was trying to figure out why this is such common advice but doesn’t really make sense to me, and I think it comes down to a couple of things:

1. I already have a great team
2. Why accept any risk of personal bankruptcy?

Let me expand.

A business that can plug into existing team

I think for the acquisition that I am looking to make, I want to find a business where it is just a really small team, maybe primarily just the owner, where I can acquire the business and then plug it into the team that I already have in place at ProjectionHub.

If I didn’t already have a great team, I could see more value in buying a business that has a team and processes in place, but honestly, that just feels like more risk to me.

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What if I love the business, but don’t care for the existing team? That sounds stressful to have to remove the existing team and replace them with my own hires.

I think this leads me in the direction of smaller businesses, not larger ones.

Why risk personal bankruptcy?

I know business ownership is risky, and if you aren’t willing to risk personal bankruptcy then why would a lender be willing to lend to you? I get that, I was an SBA lender for over 10 years and I often had to tell business owners that it was important to us as the lender that they had something to lose.

I still think that is true when it comes to lending, but for me, I have a business that is working well right now in ProjectionHub, I really don’t have a reason to take a big enough risk that it could lead to personal bankruptcy.

So again, this leads me toward a smaller acquisition that could be accretive to what I am already doing at ProjectionHub but has no risk of ruin.

Warren Buffet said, “In order to succeed you must first survive.”

It seems like if the business can survive long enough and we just keep doing the next right thing, we are likely to succeed, so there seems to be little reason to introduce the possibility of the business not surviving.

It seems to me, that as your business grows, or your personal net worth grows, you could acquire larger and larger businesses without the risk of bankruptcy. I am not afraid of taking some risks, but I just want to make sure that whatever risk I take won’t cause me to lose everything.
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What do you think? Go big or go home? Or take a small calculated risk without betting the farm?

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