Small Businesses vs.
Middle Market Businesses

Small Businesses vs. Middle Market Businesses

In the last issue (#16), we provided an Overview of the 15-Step Business Sale Process. The end of the previous newsletter indicated the sale of middle-market businesses utilizes a different sale process than the process of selling small businesses. This issue will highlight some of the differences between Small Businesses vs. Middle Market Businesses.

A Favorite Famous Quote
"When you set goals, something inside of you
starts saying, "Let's go, let's go, and
ceilings start to move up." Zig Ziglar

Small Businesses vs. Middle Market Businesses

Small businesses (those valued below $3,000,000) are typically acquired by individual buyers. Middle market businesses (those valued above $5,000,000) are usually acquired by larger businesses or private equity groups (PEGs).

Companies valued between $3,000,000 and $5,000,000 might possibly be acquired by wealthy individual buyers, but also might be able to be sold to a larger business or a PEG.

Reasons larger businesses acquire smaller businesses

Larger businesses acquire smaller businesses for strategic or synergist reasons such as:

• Acquiring a business to expand into additional geographic markets
• Acquiring new product lines to sell to an existing customer base
• Acquiring new customers to sell existing complementary products
• Acquiring new technologies
• Acquiring a business to increase revenues while also achieving operational efficiencies through cost-cutting opportunities such as eliminating duplications in staff
• Acquiring a business to eliminate competition

About private equity groups (PEGs)

PEGs are generally funded by wealthy individuals and institutional investors who are looking for a high return (20- 30% or more) on their invested capital. To maximize their return on investment (ROI), PEGs will use a combination of debt and equity financing to acquire a business and their decisions are mostly driven strictly by analysis of their ROI. As a result, PEGs will not typically be able to pay as much for an acquisition as a strategic/synergistic larger business. However, sometimes the identified pool of potential strategic/synergistic businesses may not be interested in the target acquisition. Since very few individual buyers can afford a middle market acquisition, PEGs are usually the best alternative. In addition, PEGs may have a portfolio of previously acquired businesses that could benefit strategically or synergistically from an acquisition.

$1,000,000 or more in EBITDA typically needed to attract larger businesses or PEGs

Unless a company has a minimum of $1,000,000 in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), it is unlikely to be acquired by a larger business or a PEG. For most readers of this newsletter, your business is likely to be acquired by an individual buyer.

A word of caution regarding selling to competitors

Despite the perceptions of some business owners, it is not a good idea to ask competitors if they are interested in buying your business. In most instances, the competitor will feign interest to learn more about your business, and then use that knowledge to try to drive you out of business. For more insight, read this newsletter article: Issue #22 - Customers, Suppliers and Competitors as Buyer Prospects.

Smaller businesses have an offering price and interact with buyers sequentially

Smaller businesses typically go to market with a defined asking price, and the broker and owner interact with prospective buyers sequentially as they express interest in learning more about the business. Unless offers are received at the same time, they are typically evaluated sequentially and independently until an acceptable agreement is negotiated with an individual buyer.

Differences in the sale/marketing processes for middle market businesses

Middle market intermediaries initiate contact with numerous larger businesses and PEGs without establishing an asking price, attempting to generate simultaneous interest to create an auction environment. It is usually a two-step process, with ....