Small businesses have an oversized impact on the economy. In the United States alone, they employ more than 47 percent of the private workforce and more than 58 million people, according to the U.S. Small Business Administration. A recent survey by Guidant Financial found that 54 percent of small businesses are owned by baby boomers, the generation born between 1946 and 1964.
These owners are preparing to retire or are already in the process of retiring. In fact, about 10,000 baby boomers in the U.S. reach retirement age every day. But this huge generation of business owners also has a huge problem: many lack succession plans.
There are many businesses (with millions in revenue) for sale but not many buyers, because the next generation isn’t interested in owning these businesses, which are often seen as unsexy or traditional. That means exit values are pushed lower.
These business owners want to tell their friends at the country club that they sold the business, rather than wind it down themselves or leave it to brokers or advisers. They want to exit on their own terms with a partner they trust — and are open to creative deals that help them do that.
This is an enormous opportunity for anyone looking to acquire businesses. With the right approach, you can often buy these businesses with little or no money upfront and with deal structures that minimize the risk. And it all happens in a way that is good for buyers and owners alike. Here’s how:
1. Position yourself to attract deals.
These types of deals are often hiding in plain sight. Much of this opportunity is there for the taking if you advertise that you’re in the market.
To attract these deals, you just need to change the way you present yourself. Introduce yourself at networking events as an investor, not an entrepreneur or executive. Tell everyone you meet that you’re looking to buy businesses or acquire competitors in your space — and be specific about the industries you’re interested in.
In decades of doing these types of deals, I’ve seen this subtle shift work wonders hundreds of times. Others no longer see you as a transactional entrepreneur looking to “sell” them on your business. You become an investor who isn’t asking for anything, so others are often more willing to help you. You’ll start having more interesting conversations and getting referrals.
2. Build relationships based on emotion, not logic.
When you do find potential deals, you’ll see that these business owners are different from those involved in typical mergers and acquisitions.
M&A is typically a transactional process — it’s cold and logical. With an owner-managed business, however, you’re often dealing with someone who has run the business for decades. Their calculations are personal and emotional, not just logical.
They are looking for a safe pair of hands to take over the business. Deals are done based on rapport. The principle that applies to all sales is especially true here: We sell to people we like.
Younger generations are completely comfortable building transactional relationships online, on social media and at arm’s length. But baby boomers often require an in-person relationship.
Go into any potential deal with this top of mind, and you’ll stand a far better chance of successfully moving it forward.
3. Solve their biggest challenge.
Too many people enter these deals just thinking about price. Of course, it is a critical component of the deal, especially since selling their business means losing their main source of income with retirement looming. But you need to start with how you can solve the owner’s biggest challenge. It may not be making a certain amount of money or getting to a certain number.
Legacy is a powerful motivator. They may favor those who can demonstrate that the business will remain a powerful brand or grow into a household name.
Sometimes, they just want to move fast. Maybe they have a sick spouse or a friend has just died, and they want to get the most out of their remaining time.
The point is that motivation isn’t always just a number. It goes deeper. Uncover the owner’s real — and biggest — challenges, and then do your best to structure the deal so you solve them.
4. Understand that you can do these deals without debt.
Much of the traditional M&A advice out there is dominated by brokers and advisers claiming it’s impossible to do deals like this without taking out a loan.
But as someone who’s done over 100 of these deals and advised on hundreds of others, I disagree: Nearly all 100 of those deals were done entirely without cash (or bank debt) and totaled 40 million euros in exit value.
There are many ways to structure a deal with little or no money at risk, from deferrals to earnouts to owner financing. For instance, you might use cash from the business to buy out shareholders. Deferral deals can pay out money over time, and earnouts may link payouts to future performance. You might also swap debt for equity with creditors or work with private investors to fund portions of a deal.
The point is that you need to understand the alternate deal structures available because the “common wisdom” on the subject is just plain wrong. The opportunities abound, and they produce results you can take to the bank — without borrowing from one.
Want to share your insights in a future article? Join The Oracles, a mastermind group of the world’s leading entrepreneurs who share their success strategies to help others grow their businesses and build better lives. Apply here.
For more articles like this, follow The Oracles on Facebook, Twitter, LinkedIn and Instagram.
