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.