Lower Mid-Market M&A – A Guide to Selling Your Small-Mid Sized Business

If you are like most business owners that are looking to sell, you have kept your head down and worked 50 hour weeks for a few decades. 

You know your business inside and out. You have made mistakes and learned from them, you understand your service, equipment, finances and marketing like the back of your hand.

Now you find yourself ready to sell and you realize…you don’t know anything about selling a business! Maybe you think it is just like selling a house (it isn’t), or you think you can just put it on the market and have 3 competitors make bids on it (unlikely).

We put this article together as a way to explain what selling a small-mid sized business is like, who are the key players and what major factors you should look for in a buyer.

Who Are the Sellers in the Lower Mid-Market (small-mid sized businesses)

Exact definitions vary, but When financiers talk about the lower mid-market they are generally referring to businesses between $1M – $10M in annual profit. 

Main street businesses are those with under $1M in profit and mid-market are generally those with $10M – $100M in profit.

Most sellers are founders or partners who have run the business for decades themselves. Some bought the business and a small number are second or third generation owners.

Related

We compiled a FAQ section for small-mid sized business owners that are entertaining a sale.

Who Are the Advisors in the Lower Mid-Market (small-mid sized businesses)

Businesses in the lower mid-market can sell to investment companies, competitors and strategic acquirers without soliciting the services of a broker or investment bank. However, it may be wise for these sellers to still retain the services of competent attorneys, CPAs and consultants.

Lower mid-market businesses that are actively soliciting offers from buyers will have their business listed for sale with either a boutique investment bank or a business broker.


These intermediaries may work on a success fee only basis, but will likely charge a retainer of not less than $50,000 before ever listing your business on the market.

Who Are the Buyers in the Lower Mid-Market (small-mid sized businesses)

The lower mid-market does not have the clearly defined buyer pool that the mid-market (sell to private equity companies) and main street businesses (sell to individuals or their employees) have.

Businesses in the lower mid-market are often out of the financial reach and expertise of individuals and small partnerships. 

In addition, these small-mid sized businesses do not offer enough upside to private equity companies that have to get a return by allocating large sums of investor capital. Several of these companies operate by using a leveraged buyout acquisition model. This is a model that we think is outdated. We believe we have come up with a more enticing offer for small-mid sized companies.

There is one exception to this rule in that some individuals with $500K or more in savings and expertise in a given industry may be able to get great financing terms through
the SBA to purchase a lower mid-market business. However, finding this buyer may end up being a witch hunt.

Are there any better options to sell a small-mid sized business?

We have taken a good hard look at the market for buying and selling small-mid sized businesses and thought that there has to be a better way. Why is it that sellers get raked over the coals when they look to transition into retirement.

We have seen great businesses sit on the market for years without selling and ultimately sell for 1.5X profit. We saw this as an opportunity worth pursuing, and outlined our business model to take it on.

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The Problem...

No suitable buyers

The lack of quality, capable buyers in the lower mid-market has created a glut of sellers that up until recently have not been able to sell their business for favorable terms. 

Left with poor options

These business owners have either wound the business down entirely, sold it to the employees for a small check each month, or sold to a predatory investor that loads the business up with debt and liquidates the assets.

We thought that there has to be a way to fairly compensate the seller and the staff while still generating a desirable return for the business buyer.

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Our Challenge...

At Minerva, We thought that there has to be a way to create a different type of investment business. 

Our goal was to create a business that provided so much value to employees and sellers that they would jump at the idea of selling their business to us.

In particular we wanted to:

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Our Solution...

After months of discussion with industry professionals, hundreds of financial models and deal book reviews, we came up with a business model that is unique in the industry and accomplishes all of our goals.

In our standard acquisition model, we have 4 tools that we use to compensate the business seller. The 4 tools we utilize are:

  • A cash down payment. Because of our credit worthiness, expertise and level of assets the business has, we are able to acquire capital to
    pay the seller a cash payment at the close of due diligence (typically within 30 days of the deal close). This down payment is typically between 30%-40% of the total
    valuation of the business.
 
  • A seller note. This is where we will make payments to the seller with interest over the first 3-4 years after the business transaction. This is a benefit to both us and the
    seller, as we will be able to pay more money over the course of a few years than we could up-front so the seller gets higher total compensation that is paid over
    a number of taxable years.
 
  • A royalty. Once the deal closes, it is rare that the buyer and seller part ways. In fact, it is commonplace for the seller to continue running the business for a period of one to
    three years. During this time period, the seller is paid a royalty as a percentage of revenue the company generates. This helps to make sure the seller is compensated for
    their efforts in growing the business and they are incentivized to continue working.
 
  • Retained equity. We ask that all sellers retain a piece of the businesses equity so that their interests are aligned with our own. With the supporting
    ecosystem we bring to the table to support the business and a capable operator filling in as the seller departs that we hope to be able to hire, we believe the businesses
    best years are in front of it.

We believe that these compensation plans in conjunction with one another will provide the seller with higher total compensation than they could get elsewhere, limit our out of pocket risks as investors, allow us to generously compensate employees and managers with equity in the business and most importantly, align all parties interests.

An overview of Minerva's acquisition structure

buy & sell small business

Our Ecosystem of Support

It has been our observation when looking at the lower mid-market that many companies seem to be having success while only operating at 50% capacity. They may be operating ineffectively, with poor marketing or supply chain and still making millions of dollars in annual profit.

While major corporations can have an internal team for any task to make sure no stone is unturned in their business, lower mid-market businesses  have to do without many services or rely on another business to provide the service for a fee. 

For this reason, we have built a supporting ecosystem of business service companies in finance, legal, accounting, marketing and consulting to work with our investment companies to get them operating at peak performance.