Strategic Exits: Options for Selling Your Small Business
Do you own a successful business that generates a decent income, but you feel like it’s not big enough or scalable enough to attract the right buyers? You might have heard the term “lifestyle business” thrown around by some deal makers, but don’t let that discourage you. You have more options than you realize. A lot more!
In this article, you’ll learn how to sell your small business for maximum value, even if you think it’s too small to interest financial or strategic buyers. You’ll also discover some alternative paths to sale that might suit your goals better.
But first, let’s define what we mean by a “small” business.
What is a Lifestyle business?
A small business is one that has less than $2 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). This is a common metric used by buyers and sellers to measure the profitability and cash flow of a business.
These are often called lifestyle businesses, which means they provide a good income for the owner, but are not always attractive to financial or strategic buyers. Financial buyers are typically private equity firms or search funds that look for businesses that are big enough and growable enough to generate a high return on investment. Strategic buyers are usually larger companies that look for businesses that can complement or enhance their existing products, services, or markets.
Why are smaller businesses not attractive to these buyers? Because they don’t have enough impact on their portfolio or bottom line. For example, a private equity firm that manages $500 million of assets might not be interested in buying a business that generates $1 million of EBITDA, because it would only represent 0.2% of their portfolio. Similarly, a large company that makes $100 million of revenue might not be interested in buying a business that makes $5 million of revenue, because it would only add 5% to their top line.
So, does that mean that smaller businesses are worthless or unsellable? Not at all. It just means that you need to find the right buyers and the right ways to sell your business.
How to sell your lifestyle business for maximum value
If you want to sell your smaller business for maximum value, you need to do two things:
Prepare your Business for Sale:
Before you put your business on the market, you need to make sure it’s in the best shape possible. This means:
Cleaning up your financials: You need to have accurate and up-to-date financial statements that show your revenue, expenses, and profits. You also need to adjust your EBITDA for any one-time or non-operating items, such as owner’s salary, personal expenses, depreciation, interest, taxes, etc. This will show the true cash flow of your business and make it more attractive to buyers.
Improving your operations: You need to have efficient and effective systems and processes that help run your business smoothly and consistently. You also need to have a strong team that can operate the business without your involvement. This will show the value potential of your business and make it more attractive and transferable to interested buyers.
Increasing your sales and profits: You need to have a clear and compelling value proposition that differentiates your business from your competitors. You also need to have a loyal and growing customer base that generates recurring and diversified revenue. This will show the growth of your business and make it more profitable to buyers.
Find the Right Buyers:
Once your business is ready for sale, you need to find the right buyers who are interested in your business and willing to pay a fair price. These buyers are not the typical financial or strategic buyers, but they are out there. Here are some alternative paths to sale that you can explore:
Employee stock ownership plan (ESOP): An ESOP is a type of employee benefit plan that allows you to sell your business to your employees. This can be a win-win situation, as you can get a fair price for your business, while your employees can gain ownership and incentives to continuing growing the business. An ESOP can also have tax benefits, as you can defer or avoid capital gains taxes on the sale, and your employees can pay for the purchase with pre-tax dollars.
Management buyout (MBO): An MBO is a type of leveraged buyout that allows you to sell your business to your management team. This can be a good option, as you can sell your business to people who you know and trust, while your management team also gets the opportunity to own and run the business. An MBO can also be financed by a combination of debt and equity, which can reduce the upfront cash required by the buyers.
SBA financing: SBA financing is a type of government-backed loan that allows you to sell your business to a third-party buyer. This can be a great option, as you can get a higher price for your business, while your buyer can get a lower interest rate and a longer repayment term. SBA financing can also cover up to 90% of the purchase price, which can reduce the down payment required by the buyer.
Search fund: A search fund is a type of investment vehicle that allows you to sell your business to an aspiring entrepreneur. This can be an attractive option, as you can sell your business to someone who is motivated and qualified to grow the business, while the entrepreneur can get the funding and support from a group of investors. Search funds are usually looking for businesses that are bigger and more scalable, but they might be willing to consider smaller businesses that have potential.
you have more options
Selling your lifestyle business can be challenging, but not impossible. You just need to prepare your business for sale and find the right buyers who are interested in your business and willing to pay a fair price. Don’t let the term “lifestyle business” discourage you. You have more options than you realize. A lot more!
Got questions or need a hand? Shoot us a message — our team is here and ready to help out: Talk to Kirk
