If you’ve found your way to this article you’ve no doubt found out how difficult it is to sell a mid-sized or small business. The lower mid-market (small-mid sized businesses) are what business school professors would refer to as inefficient markets. There are far more sellers of small-mid sized businesses than there are buyers.
Why are there no buyers for small & mid-sized businesses
Maybe you set out on this process thinking that selling your business is like selling your house and you’ll be receiving 5 offers within $20K of asking price after the first open house. Maybe you were sold a bill of goods by your broker who overvalued your business in order to get the listing.
Regardless of why you find yourself in this position, Finding a buyer that has the skills to buy and run a business and who also has the capital and credit that makes it possible to buy a business can take several years.
So what do you do to get the business sold
Depending on how large your business is, where it is located and what industry it is in, There are a few options you have to actually get your business sold.
Sell to an investment company
Luckily, that is not how we work at Minerva. We sit down with business sellers and map out a transition plan. Depending on the size of the business, management team that is in place and the industry that it is in, we may ask the seller to stay on for up to a year in order for us to find and hire their replacement.
We look for businesses with great people and great reputations that generate over $1M/year in profit. We typically pay a down payment of 30-50% of the purchase price, another 30%-50% over the next 3-4 years and ask that they seller either accept a royalty or an equity stake for the coming few years.
This allows the business seller to take part in the businesses future growth while also incentivizing them to offer their support and guidance after the close.
Sell to a competitor
If for some reason you aren’t interested in selling to an investor, you may be able to sell to a competitor. They likely won’t agree with you on what the business is worth, but they have expertise in the industry, so they should be able to run the business properly. Many deals that are sold from one competitor to another are paid over the course of 4 or 5 years.
Sell to an employee
If your business is large enough for you to step away without worrying about the operations suffering, it may be large enough for you to sell your business to your managers. You may have one or more employees who are creditworthy and can obtain an SBA loan in order to finance a large portion of the purchase price. Of course, like any other sale, you’ll have to find a buyer who you believe is capable of running the business without your oversight. Depending on how strong your staff is, this may or may not be a good option for you.
While these may not be the options promised to you by the business broker that is trying to win your business by telling you how many offers they’ll get you. This is the reality of selling your small and mid-sized company.
How are business acquisitions financed
One of the reasons it is so hard to sell small businesses is because they are so hard to finance. On the rare occasion one does sell with a broker (less than 1 in 7 listings actually sells), the buyer needs to have 10-15% down payment and 700+ credit. They need to be willing to personally secure the loan with their personal assets and the loan needs to be approved by the US Small Business Administration (SBA) which isa process that takes ~90 days. Oh, and did we mention they often need management experience in the industry in which they are buying and the business needs assets in order to secure the financing.
…Now you see why it’s so difficult.
So how do they actually sell?
Sellers need to be flexible on the terms that they are looking for to sell their business. If you are stuck on the idea of there being a bidding war for your business and several buyers making cash offers, you will never sell.
In all of the situations outlined above (investment company, sell to a competitor, sell to an employee) there will be terms that allow the buyer to pay for the business over a number of years. Because investment banks don’t start lending for acquisitions until they get to $10M in purchase price, the seller will need to hold a note for the business payment, accept a royalty or maintain a piece of equity. That is how deals are made in the lower mid-market.