Grow Your Business for a Better Deal

Monday, September 20 2021

Mergers and Acquisition (M&A) firms are specialists in helping you navigate the complexities and increase the money you put in your pocket when you sell your business. But are you big enough? Most won’t take you on unless your business is generating greater than $2 million in free cash flow or adjusted EBITDA*. Some boutique firms will go as low as $1 million but that’s about the limit.

If your business is below $1M the challenges mount up:

  • A “lifestyle business” may feed you and your family, but won’t get the attention of Private Equity firms, or savvy investors/serial entrepreneurs. Prospective buyers are limited.
  • It is actually harder to sell a small business than a big one. It takes a lot of work for both you and the M&A firm. Most won’t even start unless you commit to a minimum payment that may take a serious chunk of your proceeds. Still, if they choose to take you on, it’s probably worth it because without them you may get nothing. A business broker told me that smaller companies have less than a 20% chance of finding a buyer.
  • Let’s say you think your business is worth $1 million. Ask yourself, would you invest that to purchase this business? Would you recommend it to someone you love? Remember that with a million to invest, you could get 8-10% or approximately $90k in free cash flow each year from the stock market without lifting a finger. Will your business double or triple that?
  • You probably run lean and don’t have a GM. Selling a business takes a lot of time from the owner and it’s not the time to take your eye off the ball of managing it.
  • Your ‘multiples’ will be lower. Businesses vary, but you might get two to four times adjusted EBITDA for a small business. If yours is $250k for example, do the math. The higher the EBITDA the higher the multiple you will attract. Fortune 500 companies have much higher multiples as their size and maturity makes them far less risky than your business in the eyes of investors/acquirers. The best way to increase your multiple is to start a bidding war, not an easy task when you have few prospects.

Selling your business is hard work. It’s surprisingly complex and has potential tax liabilities (that can be minimized given the right advice and time). So, grow your business as much as you can during the lead-up to your transition and then find someone you like, trust and respect who can help you sell it.


*Earnings Before Interest, Taxes, Depreciation and Amortization