Size is critical for doing deals, especially when you are new to buying and selling businesses.
Let me explain…
You should focus on businesses turning over between $500,000 and $10 million in revenue.
The optimum range is $1—5 million. Why this particular range?
Businesses with below $1 million aren’t really worth the effort unless you’re buying several of the same type with plans to consolidate them. For example, acquiring 10 hair salons with $500,000 each in revenue and combining them into one company.
Businesses with above $10 million often have more employees and corporate structure. You may find they care less about the emotional things that are important to identifying a motivated seller, such as maintaining their legacy and culture by transferring the business to a “safe pair of hands.”
That said, the acquisition process is the same whether a business has $500,000 or $10 million in revenue, so aim as high as you can.
I have done cash-free deals significantly larger than $10 million, but they take longer and tend to have other suitors negotiating against you.
Stick to below $10 million in sales and you will have plenty of opportunities.
The key to the system is to (fairly) play on seller emotion, including frustration. For frustrated owners, patience is significantly lowered – there is usually no succession plan and they just want out.
The problem is… they are trapped! These owners have employees to support, suppliers and customers to satisfy, leases or loans and other liabilities that are not going away.
Though the owner may not require income, the cost to shut the business down may be significant. And why should a great business shut down when the only issue is that the owner has lost the drive to keep it afloat?
Simply put, look for a tired owner-manager.
He or she will most likely have founded the business years ago, achieved success, survived a recession (or several), be in pretty good shape, have no offspring willing to take the reins and have one major fear: the competition.
Owners of small businesses greatly fear the competition in a formal sale process. Why?
Competitors that don’t necessarily want to buy the business may enter the process to get the financial, customer and legal information on the company. They’ll then use that information to gain a market advantage and defeat the business.
I have seen it hundreds of times in my career… Customers stolen on the promise of cheaper prices… Key employees incentivized to jump ship and bring customer relationships with them.
It’s unfair and morally shocking, but believe me, it happens. And once it starts, the business for sale quickly withers and dies with its culture, history and legacy destroyed.
But with you as a potential buyer, the owner does not have to resort to opening the sale up to competitors.
In summary, stick to the sweet spot — the $1—5 million revenue range — especially if it’s your first deal.
Until then, bye for now.