My Business is Unique - Will Investors Have Interest?

According to the U.S. Small Business Administration, there are over 30 million businesses operating at any given time in the United States. The North American Industry Classification System divides those businesses into 20 broad sectors which are each further divided into hundreds of subcategories.?

Therefore, the chances are extremely remote that any business is so unique that it will not be of interest to other buyers or investors. In the current environment, properly valued and marketed businesses are receiving multiple responses and subsequently multiple letters of intent to purchase each company.

The greater determinant of interest has to do with a company’s profitability and cash flow generation. If a business is profitable, and has solid growth prospects, then the answer to the question, “Will there be broad interest from buyers?” should always be a resounding “yes!” Nonetheless, the absolute number of specific buyers showing interest will depend upon the business category, the total revenue generated annually by the business, and the historic “core profitability” or EBITDA that results.

There are generally three broad categories of buyers or investors in the market today

Businesses With Revenue Under $5 Million:

For the smaller category of companies with revenue of under $5 million, the number and type of buyers can vary widely. It is not difficult for any number of individuals or other active small businesses to purchase a company of that size. Their intention can be to manage it, or to “roll” it into a similar enterprise that they already own, accomplishing significant growth in the process. Further enabling this category of buyer, the U.S. Small Business Administration offers government backed loans ranging in size from $500,000 to $5,000,000, allowing for a greater number of buyers to potentially purchase any smaller business.??

Building a business from the bottom up is generally an expensive and time-consuming process. It can be much more efficient to grow an existing business by purchasing one that is similar and incorporating it into the existing business. In this way a buyer can add to their current customer base and distribution pipeline while realizing the economies of scale that come by eliminating duplicate overhead and expenses. These “roll-up” buyers are always on the lookout for opportunities.

Businesses With Revenue Over $5 Million:

For businesses with revenue of $5 million or more, the depth of interest increases dramatically and is represented by traditional buyers and larger roll-up buyers, as well as those known as private equity funds. These are firms that purchase private companies with money that has been pooled by investors for the expressed purpose of building a portfolio of multiple smaller businesses. The number of private equity investors and funds currently active in the market is enormous.?

Using the 5-year US Treasury as a market proxy, one can see that interest rates fluctuated between 1% and 3% from 2015 through the end of 2018 when 5-year rates began a steady decline to a low of .22% in August 2020. 5-year rates did not reach 1% again until April 2021 and then steadily climbed to 4.89% in October 2023. During the 2020-2021 low-interest rate period, anyone who had a mortgage would have refinanced it at those historically low rates, and, if possible, still holds it today. It is not unreasonable to assume that astute investors also borrowed significant amounts of money at those low rates, intending to reinvest the money in “alternative investments” with much higher rates of return. Well run business with historically solid returns are certainly attractive alternative investments. Over the succeeding two years, we have seen a dramatic increase in the number of private equity investors expressing interest in nearly every business that we represent for sale.?

Transfers of ownership are closing faster and at higher prices that we had seen in the previous two-year period due to this increased level of competition. It appears that much of the capital raised in 2020 and 2021, and targeted for investment in solid middle market businesses, remains uninvested.?

A further statistic that we believe is driving the increased demand for businesses relates simply to the passage of time. Many business owners who are contemplating the sale of their companies now are Baby Boomers who are reaching their 60’s and 70’s and want to retire or make plans to do so in the near future. However, the supply of businesses owned by this group of potential sellers is rapidly shrinking.?

The Baby Boom Generation is defined as those persons born between mid-1946 and mid-1964 and is the largest generation in history, making up close to 25% of the population in 2013. If one assumes that these ‘boomers” began businesses at age 22 and on average decide to become sellers at age 65, then there would be an abundance of businesses for sale between mid-2011 and mid-2029. Astute investors, therefore, realize that we are nearing the end of that “generational bubble.” The competition for solid businesses will likely become even greater over the coming 3 to 5 years as that pool of potential sellers diminishes further.

Any owner who is contemplating a sale and is concerned that his business might be too unique, is likely concerned for no reason. The current market for well managed and profitable companies is extremely strong and deep. A Neumann & Associates has been confidentially valuing businesses and representing owners in the transfer of those assets for over 20 years. Our team has a proven process that is designed to determine the maximum value of a business and to realize that value for the owner upon sale – while protecting the owner’s and business’ confidentiality. At the same time, we focus on giving the owner choices as to whom they want to purchase their company. After a lifetime of effort, most business owners want to be comfortable with the person(s) who take over and run their company. It is not always the highest offer that prevails in the competition for the purchase of a company.?

Having a truly unique business in the current environment can be a huge plus. If it is difficult to replicate and is profitable, then there will always be buyers; however, the marketing program may need to be customized and targeted in order to reach all of them. Potential sellers should spend time working with an experienced M&A Advisor to make sure that that their business is running at maximum efficiency and that every potential buyer in confidentially aware of its availability.?