3 Small Business M&A Myths Debunked

Judge Dan Hinde

With the Great Wealth Transfer upon us, there’s a huge opportunity for firms to support small business M&A transactions. Indeed, as Baby Boomers reach retirement age, many small businesses will soon be changing hands. Yet, millennials are less eager to take over the family business than generations before them – meaning that countless businesses will soon be up for grabs by unrelated, third-party entrepreneurs.

It’s a burgeoning trend called “entrepreneurship-through-acquisition” (ETA), and it’s becoming increasingly popular among white-collar, corporate professionals who are looking for a change of pace. As a result, with all these new, first-time business buyers out there, there’s certainly an increased demand for lawyers who can help facilitate the small business M&A process.

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That said, Main Street business transactions certainly differ from traditional M&A, which has long focused on multimillion-dollar enterprises – not Main Street businesses. There are a lot of misunderstandings around small business M&A, and in my time working in this practice, I’ve heard countless myths come across my desk. Here’s my take on the truth, and what lawyers need to know if they’re considering opening up a practice of their own:

Myth #1: Because they’re small, SMB transactions are quick and clear-cut.

Many small business buyers don’t have a wealth of experience in the M&A world (as some of your large enterprise clients might). That means even if the transaction feels smaller to you, these clients will need individualized attention and high-touch support. Particularly for clients undergoing the process for the first time, it’s not uncommon to start from scratch, and answer seemingly simple questions – ranging from “what’s a letter of intent?” to “what exactly will closing day look like?”

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What’s more, I’ve found that many entrepreneurs buying a small business are looking to get “back to the basics” – ditching corporate life to focus more on the things that matter to them, like family, travel and hobbies. That means they may have other (very important!) personal home and family life obligations get in the way of their deal – more than you’d expect during a big enterprise transaction. For example, we recently supported a client looking to buy a clean energy company. During the transaction period, she married her fiancé, worked as a child advocate in court proceedings, and went on two cross-country trips with her new wife. This meant the deal was strung out over several months, and our team had to accommodate quickly changing schedules, balance remote communications, and more. While this may seem hectic, in small business M&A, remaining flexible and offering that individualized attention is just par for the course.

Myth #2: Small business M&A isn’t profitable.

Many peers I speak to are surprised that we focus exclusively on the small business M&A market; they don’t think it’s worth the time and effort, given the small dollar amounts on the deals. However, this couldn’t be further from the truth. In fact, when it comes to M&A, McKinsey found that “pursuing many small deals that accrue to a meaningful amount of market capitalization over multiple years” creates the most value for firms – not relying on “episodic, ‘big-bang’ transactions.”

Plus, there’s huge demand in the marketplace, especially as the Great Wealth Transfer rolls in.  Research shows that nearly $7 billion in small and medium businesses (SMBs) currently held by Baby Boomers will be up for purchase by 2030. What’s more, as we teeter on a recession and massive enterprise layoffs continue, a growing number of white-collar professionals are trading corporate life for small business ownership as a means of taking back ownership of their lifestyle and job security. This is especially true with many of these Main Street businesses being more “recession-resistant” or “recession-proof” than their big corporate counterparts. We’re talking about roofing and HVAC companies, landscapers, manufacturing and distribution, and more – they offer services that people in those communities need, regardless of what the market is doing.

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All this is to say – it’s an opportune time for lawyers to support hopeful entrepreneurs, and as ETA continues to grow in popularity, I’m sure we’ll see that demand swell even further.

Myth #3: Small business M&A isn’t ‘high stakes.’

Sure, helping a first-time entrepreneur purchase a $1 million HVAC company in rural Kansas may not sound as “high pressure” as the billion-dollar Big Tech acquisition that you facilitated at your major Big Law firm. But buying a business, of any size, is huge stakes for the entrepreneurs you serve. Oftentimes, they’re leveraging their entire life savings, signing a personal guarantee on all of their assets (including their family home), and making a monumental lifestyle shift to pursue this business.

On the other side of the coin, many of the business owners we deal with have had their business in the family for decades, and there are many considerations that go into who the business will be passed down to, and how they will facilitate the deal structure as a result. With all that’s on the line for both parties involved, even our smallest transactions feel “high pressure.”

Opening a small business M&A practice may seem like a foreign concept to some, but it’s a space that’s only growing as small businesses continue to change hands in the coming years. Firms who recognize this as an opportunity – and are willing to offer that individualized attention clients need – will continue to reap the benefits, while also supporting the vital small businesses that form the backbone of our communities.

Kevin Henderson

Kevin is a founding partner of SMB Law Group, a remote-first firm dedicated exclusively to small business M&A. Kevin has over a decade of experience in M&A, venture capital, and capital markets – having worked for elite law firms such as Cravath, Swaine & Moore LLP and Cooley LLP, and serving as in-house senior corporate counsel for securities and M&A for Flowserve Corp. He is a graduate of the University of Michigan Law School, and is licensed to practice in California, New York, and Texas.

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