One of the largest segments of businesses in the U.S. has been largely ignored by investment banks, but we’re here to change that.
What is SMB?
We define companies with approximately $500,000-$2,000,000 of annual discretionary earnings as Small and Midsize Businesses (SMB). The SMB segment of the market is made up of roughly 2 million U.S. companies that employee approximately 25 million people.1
By contrast, we define the next segment of U.S. businesses, the Lower Middle-Market (LMM), as companies with between $2,000,000-$10,000,000 of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). There are approximately one-tenth as many businesses that fall into this segment as the SMB segment, but LMM companies employ roughly the same amount of people overall as SMBs.2 SDR’s traditional investment banking services are focused on LMM companies.
Despite their relatively smaller size, we view SMBs as great companies that have a high demand in the marketplace and can sell for a premium price. However, they often have many challenges during the sales process that larger companies typically don’t have, and they are therefore often ignored by investment banks.
Why are SMBs unique and challenging to sell?
Some of the challenges of selling Small and Midsize Businesses may include:
- Unique family dynamics that affect the ownership structure or employment situations
- Overdependence on the owner(s)
- High levels of customer concentration
- Facility/lease issues
- Excess debt
- Obsolete inventory or equipment
- Lack of appropriate legal or accounting advisors
- Small buyer pool (often too small for financial or industry buyers)
The commonality of some (or many) of these challenges during an SMB transaction process makes proper representation and expertise even more valuable for these business owners.
Where do these owners typically turn?
Most investment banks won’t work with smaller companies. As a result, SMB owners are often forced to work with business brokers. Most business brokers are unprepared to deal with many common business sale issues and simply list a company online and hope for a buyer to show up. The low level of service provided by business brokers almost always results in a longer timeframe and lower sale price for the owner.
SDR’s SMB Division
At SDR Ventures, one of our key focus areas is Small and Midsize Businesses. Our goal is to provide high-quality investment banking services to smaller businesses with the objective of maximizing the sale price, while minimizing the timeframe and problems.
We start by preparing high-quality marketing materials and present the business with the level of professionalism we dedicate to every investment banking engagement.
“Although our company hadn’t reached a full national scale yet, we had grown steadily over the past several years, expanded our geographic reach and increased our wellness service offerings. We believed there was strong value in the business and wanted the best representation. We always felt like a high priority for the SDR team, and that level of attention and perseverance during the transaction process paid off. SDR’s approach with small businesses works.”
– Brett Shrewsbury, Former Co-Owner, Preventive Health Now
In addition to anonymously promoting the business through online services (which do have merit when used in a supplemental manner), we conduct exhaustive research on current, likely and potential buyers. This includes our own substantial buyer database of strategic acquirers and high-net-worth individuals. We also thoroughly qualify every prospective buyer to ensure they have the financial and operational capability to complete a transaction. We do all of this while maintaining the highest level of confidentiality.
Our SMB Director, Mike Grande, has completed over 60 transactions within the SMB space, including selling a number of his own companies prior to joining SDR. He is highly skilled at solving the unique challenges that accompany the sale of smaller businesses and achieving the absolute highest sale price for owners. Simply put, the challenges outlined above do not scare us off because our team is highly skilled and experienced in working through them.
SMB owners should not have to settle for a business broker solution that is typically nothing more than an online listing centered on a wait-and-see approach. SDR Ventures has successfully closed numerous SMB transactions because we have investment banking skills and expertise in-house, yet we understand that small businesses have unique challenges that can’t be ignored or brushed aside. Our solution and process are designed to maximize the probability of a sale in a timely manner and at the highest transaction value possible.
1-2. U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Businesses (https://www.sba.gov/advocacy/firm-size-data). Statistics as of March 2014, the most recent available data.
1. Note: Calculated SMB total consists of companies with between five and 49 employees. Totals are intended to provide approximations only.
2. Note: Calculated LMM total consists of companies with between 50 and 500 employees. Totals are intended to provide approximations only.