Small businesses are commonly looked at as ‘not worthy’ for an M&A deal. However, this couldn’t be any more wrong. 

These businesses are commonly run by families, have long, localized or industrialized experience, and offer vertical integration opportunities at a fraction of the price. 

1. Favorable Deal Supply

Baby Boomers own a large number of small businesses in the US. Around 51% of those who own a private business are expected to sell it within the next 0 to 10 years. 

Soon, there’s going to be a huge supply of small businesses available for M&A. Not any ‘old’ businesses, either, but tried and true companies that have generally been around for years.

2. Lower Valuations

Even better, these small businesses are often deals of a lifetime. Valuations are usually priced off owner cash flow.

Therefore, multiples can be materially lower than scaled assets.

According to research performed by BizBuySell, the average cash flow multiple is 2.61x for small business sales.

This is much different from large organizations, which have a valuation of 11.8x EBITDA (different metric, but a clear sign of lower valuations). 

3. Flexible Deal Structures

With small businesses, there are fewer stakeholders. This means that buyout terms are usually a lot more flexible and favorable. 

Therefore, you may be able to purchase such a company on a seller note, as an earnout, and with staged payouts. 

4. Consolidation Opportunities

Many industries remain fragmented. As a result, it sometimes makes more sense to buy your way in rather than building something from scratch. 

99.9% of all businesses in the US are considered small businesses.

Many of these are in industries dominated by small operators, like home services, making them great consolidation opportunities.

5. Vertical Integration

Buying upstream (suppliers) or downstream (distribution/service) can stabilize inputs and routes to markets.

Generally speaking, smaller targets are often the most accessible way to connect such links.

Purchasing something like a part of a supply chain can help de-risk issues in this area.

Something in which 86.2% of responders of the NAM Outlook Survey said they’ll be doing in the next 2 years. 

6. Operational Synergies

Small firms often carry fixed inefficiencies. For example, duplicated admins, subscale procurement, and manual processes.

Therefore, a capable purchaser is able to capture quick wins with minor fixes.

7. Faster Integration

Fewer systems, fewer locations, and tighter teams make integrations a much more flexible and effortless task. Therefore,

you can typically go from purchase to integration much faster than, let’s say, a large organization with multiple stakeholders.

Conclusion 

If you’re planning a M&A strategy, don’t dismiss smaller companies.

They can fill location, talent, and operational gaps at a somewhat affordable cost.

For more information about how you can purchase a small business today, feel free to contact a representative at OCX Advisors.