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Take Five #026: What sort of trends are bankers seeing in the SMB market? and more

1. “What’s your advice on negotiating with an owner who is 70+ and…”

Posted in the Buy then Build FB group this week:

What’s your advice on negotiating with an owner who is 70+ and:

A) has no clue how to value a biz
B ) thinks it’s worth 5x or 6x SDE
C) all of the above because he makes a good living and hopes to make his (easy) salary until he dies and then so be it, the business dies with him (no kids, no fam, etc).

Basically the owner wants to work until he can’t/dies. Gets a great SDE for not much work and has a manager. The manager could just do it all (and almost does). He would entertain selling and at the least a deal to pass the business to the employees and a manager who would own it once he’s gone.

30+ years old manufacturing service e type specialty niche business. Zero marketing all old relationships and referrals. Owner is not a crucial part as customers come because business offers a unique service. Has been teetering on breakeven every year for over a decade. Business revs ~1M. SDE is ~130-150k. 250k SBA loan that started to get paid this year.

I have all the details. Have done due diligence, etc. Is this a total waste of time? Is there a deal structure to make this happen.

Great back and forth in the comments on how to approach a seller like this, here’s one of the more in-depth comments:

A bit confusing. You state teetering on breakeven year after year for a decade. Then you state SDE 130-150K.

More important is what can you do WITH the business? Can you grow it? At what cost? Your TIME is a cost also..

Plus, going into it with $250K debt?

Next is WHAT are you buying? Are there hard assets? Is there a special business process?

If assets, what is the lifetime remaining in the assets? Will they be replaceable? At what costs? (Is it easier to buy new assets and recreate the business?) Can you spend the same amount of money and recreate the business?

[…]

I hope this helps to evaluate several risk points and valuation points. Simply discussing these points with the current owner may help him tosee the risks in your purchase and may have him have a better understanding of the business valuation process.

Full post from the Buy the Build FB group here.

2. You’ve clawed and scratched to win a negotiation, but how is it written?

3. Trends in the SMB market, from a banker:

4. New WSJ Article: “Who Will Inherit the Family Business? Often, It’s Private Equity”

Interesting Wall Street Journal article on how private equity firms are increasingly turning their sights towards family owned SMBs:

Private-equity firms are joining America’s family businesses. The industry that made its name taking private big corporations has shifted its focus to smaller targets, snapping up car washes, pet-food makers and specialized manufacturers, some of which have been family-owned for several generations.

Family businesses hold particular appeal for buyout firms, and they are throwing out the traditional private-equity playbook to attract them. Management is often left intact. Owners keep big stakes. Buyout firms pledge to retain employees and plow more money into the businesses.

Still, some buyout targets end up carrying heavy debt burdens that can turn a once-profitable company into a money-losing one. Families might ultimately cede control when the business is later sold so their private-equity owners can realize gains. Communities and workers, by extension, can lose their personal ties to a company’s ownership.

At the same time, the deals help aging business owners ensure a future for their companies after they are gone. Many are finding that their own children aren’t interested in taking over. Those whose children want to remain involved recognize that their offspring will need additional technological and financial know-how.

Even owners who want to keep working are often looking to untangle some of their wealth from their businesses. They are ready to share the risk they have shouldered alone for years, but they aren’t prepared to cede their legacy to a bigger competitor.

From “Who Will Inherit the Family Business? Often, It’s Private Equity” on the WSJ

5. Why the SBA "pre-approval" letter is more of a marketing tool and less about whether the company is actually bankable

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