Who Buys Small Businesses?

When we talk about small businesses, we mean firms with $20m in sales or less. Keep in mind this definition is not the standard definition of small business used by most M&A professionals (See this blog for more information).

There are fewer types of buyers for small than large business. There is also less money available to buy small businesses than larger businesses. This trend is a result of fund economics (see this blog) and current conditions in capital markets (i.e. markets for buying and selling of equity and debt).

Private Equity Add-on Acquisitions

As a result of fund structures, the least active buyer in the space is private equity. Usually they can only buy businesses in industry in which they already own a business. For example, they own a HVAC company and then they have more ability to buy another HVAC company. This type of strategy is considered an Add-on. You are literally adding one business on to another one. Traditionally funds can’t target small businesses, but in this scenario they get additional value from a private equity strategy called multiple expansion. Therefore, they make significantly more money on these types of transaction than a typically stand-alone acquisition, meaning the purchase of one business in one industry. This strategy also usually means the add-on will become part of the platform company. Back offices will be combined, firing usually takes place, and the brands are usually combined. A platform company usually refers to the first acquisition that a PE fund does in a certain industry.

Strategic Add-on Acquisition

A strategic acquisition, also sometimes called a corporate acquisition, refers to the purchase of a business by another corporate entity that is not a fund. These type of acquisitions are usually strategic in nature. Usually post acquisition the companies are fully integrated and use the same name, brand, and systems.

One Off Buyer

A one off buyer is often a friend of a friend that wants to take his swing at bat with the purchase of a small business. They are not very common. Most one off buyers have no industry experience and sometimes have no operational experience. They have access to some money (SBA financing or family money) and the intention to use it.

Internal Acquirer

These types of acquisitions usually come from high-level managers. Most of the time they use SBA and seller financing because they don’t have access to equity investors.

Ex-Corporates, Independent Sponsors and fundless sponsors

These are individuals with some money and access to equity investors either at PE funds, family offices or through a network of friends. Some come from PE funds where they operate portfolio companies. Most tend to be ex-corporate guys that want to break out of their corporate jobs and make a little more money. Sometimes their source of capital is from cashing in on stock plans.

Search Funds

Search funds are small acquisition vehicles that run in two different types: self funded (Harvard Model) and traditional funded (Stanford Model). Harvard model search funds are usually recently graduated MBA’s that set up a small acquisition vehicle with their own money. They then find a business to buy and use their connections to equity markets to raise capital for the purchase of a business. More often they tend to be from HBS and that is how it got the name Harvard Model. On the other side is the Stanford Model in which recent MBA’s are backed through the sale of options to go and buy one small business. At the time of acquisition they go back to the option holders and raise money for the purchase of the business.

Family Transfer

The most common sale is more of a transfer. A business is passed from one generation to the next.