Why Small Business Acquisitions is Unique.

Why are Acquisition Entrepreneurs the KEY to small business acquisitions? Here is why:

The world of entrepreneurs buying small businesses has unique circumstances that are distinctly different from other investment asset classes. There are many factors, but there are 3 in particular that create the unique investment opportunity:

First:
The first reason stems from the presence of 'Goodwill' in the transaction.

In the world of small business acquisitions, companies are valued and transaction prices determined based on a multiple of annual profits, with little to no correlation to the value of the physical assets of the business. By definition, the money paid for the business that exceeds the tangible asset value creates 'goodwill'. Banks view goodwill as risk, and unless it is collateralized in some other way by the borrower, the loan is considered 'uncollateralized', which is next to impossible to finance with conventional financing sources.

The solution to this 'goodwill is impossible to finance' problem is to utilize the SBA's 7(a) loan, which transfers the risk of goodwill to the government. The net result is that banks, with the SBA guarantee, are now willing to fund business acquisitions that include goodwill.

However, the SBA has some rules attached to their guarantee. The rule is that an individual owner/operator has to be attached to the loan and provide several important things, including business acumen sufficient to operate the business, some financial investment, good credit and the willingness to sign an unlimited personal guarantee for the full amount of the loan.

The result is that the entrepreneur, who has the skills and willingness to meet the SBA requirements, is the key element to the deal. The deal cannot happen without that person.

Second:
The second unique factor is that despite the fact that there are 10's of thousands of businesses listed for sale at any given time, the number of solid fundable deals is very limited. A case in point is the fact that Mainshares.com, who have over 1,000 investors on the platform, only a few dozen active deals presently. It can be said that in the world of acquisitions, you don't find a good deal, you make a good deal. Each deal is completely unique. The deal maker has to 'bake the cake' from the raw ingredients. The principles and steps in the process are simple, but the execution skill required to successfully put the deal elements together is extremely difficult. It is akin to climbing Mt Everest. Few can do it alone and nearly everyone needs significant assistance. And the best 'sherpas' are in short supply. The majority of the businesses for sale never sell. And the majority of the buyers who start the acquisition journey never buy. And some that buy end up with bad deals.

Thirdly:
The way a small business acquisition is funded is unique to small business acquisitions.
The main sources of funding for small business acquisitions are seller financing and an SBA 7(a) loan. Both of these sources of funding are sourced by the acquisition entrepreneur. By befriending the seller they are able to obtain seller financing under very favorable terms. And by their skills and willingness to sign the PG, they can access the SBA funding.
Both of these sources of funding represent funding that is brought to the deal by the buyer. Together they usually represent 90-95% of the capital required to close the deal.
Additionally the buyer may invest some or all of the small remaining cash required. This means the buyer has effectively brough the majority of the capital to the deal.

Catch:
The net result of these 3 unique circumstances is that good investment opportunities in the small business world are few and far between, but some excellent buyers do not have enough cash available to fund the last portion of the capital.

Solution:
The solution to the buyers cash shortage is to incorporate 3rd party investor(s) to the deal.
The small business acquisition class has become more formalized and is enjoying immense popularity recently, offering healthy returns for the risk profile.
The fact that Mainshares.com has over 1,000 accredited investors and only a limited number of investable deals shows that good investable deals is the limiting factor.

Deals are everywhere.
Good deals are scarce.
Well negotiated and structured deals are extremely rare.
Deal making is much harder them most people realize.
I encourage acquisition entrepreneurs to seek out the assistance needed to climb the mountain. Few succeed in climbing Mt Everest. And even fewer do it alone.