Selling a Small Business

Large acquisitions make headlines every day, but smaller acquisitions happen all the time with little fanfare. The upper-middle market is defined as businesses with revenues of $500 million to $1 billion. The middle market represents businesses with revenues of $50 million to $500 million, and the lower middle market is defined as businesses with revenues of $5 million to $50 million. So, you may wonder, “What if my business has revenues of $5 million or $10 million and how is the selling process different for a smaller business like mine?”

The selling process is very much the same, regardless of the size of the business, but there are some key differences when selling a smaller company.

• Many small businesses are family-owned, and the owner is typically more involved in the day-to-day operations of the company. There may be heavier reliance on the owner and more relationship with customers, so the seller may need to stay on board for a slightly longer transition period. If there is a very strong management team in place, this will be less of an issue. Heavy owner involvement may result in more emotional attachment to the business, moving the seller out of his or her comfort zone when negotiations begin. It’s very important to find the buyer that has good chemistry with the seller, is a good cultural fit and whom the seller trusts.
• The reasons for selling a small business usually involve life stage issues or limited resources. Many sellers are simply ready to retire or to move on to another venture. Others have taken the business as far as they can, but see that the business could thrive with more financial resources or greater expertise in growing a business.
• Most large companies have their financials audited, while smaller companies do not. Although audited financials for a small company aren’t necessary, it is very important to have financials in order, and as close to GAAP (Generally Accepted Accounting Principles) as possible. Accrual financials should be prepared monthly with balance sheets and income statements that are tied out each month, and inventory should match what is on hand at the end of each month. Financial statements compiled or reviewed by an outside CPA carry more weight with buyers than those prepared in-house.
• Due diligence for a small company is likely to focus on confirming historical revenues and profitability, along with a high-level review of other components. Larger companies are typically under more scrutiny, and the buyers usually hire outside professionals to prepare a Quality of Earnings report and do a deep dive into every aspect of the business, its history and potential for the future.

• The purchase agreements prepared by the attorneys to solidify the transaction are usually less complicated and expensive for smaller businesses. Legal fees can run from tens of thousands to hundreds of thousands of dollars for a large business transaction.
• Financing typically looks different in a small business transaction. Often businesses bought by an individual or those under $5M in value involve an SBA loan. Sometimes more seller assistance is required in the form of a seller note and/or earn-out.

According to a recent IBBA report, the 2022 outlook for small businesses is strong. Transactions are expected to rise as more business owners opt to retire or pursue other interests. The pandemic has taken a toll on many business owners, as well as rising prices and tax increases. The report indicates that there are more interested and active buyers than quality deals, making it a seller’s market. That translates to higher values and better terms for sellers.

With conditions like this, it’s important for sellers to be competitive. Sellers must demonstrate that they have a high-performing business that is primed for growth. Business owners should have an exit strategy in place with their house in order.

This is our sweet spot, as we focus in the lower middle market. We are specialists in preparing businesses for sale, taking them to market, and closing deals. For more information on how to prepare your business and create a solid exit plan, call 913.685.0185 or email michael@ok-om.com.