Column: Thinking of exiting?
Finding the Right Buyer is the Key to Small Business M&A
By Scott E. Semple, senior advisor, and Sharon B. Heaton, CEO
sbLiftOff
Selling your company is a life-changing event. Successfully selling your business requires deft coordination among legal, financial, human resources and other domain experts to smoothly navigate from due diligence to closure.
But for most sellers, one question always rises to the top: Who is the buyer taking over my legacy? In this months’ discussion of mergers and acquisition (M&A) issues for small and set-aside businesses we discuss Finding the Right Buyer.
Strategic Buyers vs Financial Buyers
Most small business owners considering an exit want to sell to a “strategic” buyer. While there are benefits, (a strategic buyer knows your industry, and might pay more than a financial buyer), the problem with a strategic buyer is that it is a competitor.
This means you will be providing confidential information to a direct rival for a deal that may not close. Sellers need to enter these negotiations with eyes wide open.
Financial buyers, on the other hand, are far less likely to benefit from this same information, as they are not competitors or players in the same industry. A financial buyer will most likely be buying your business to enter the small business market or expand into your niche within the set-aside sector.
With any type of potential buyer, protecting your interests and guarding your secrets is paramount.
Set-Aside Requirements in M&A Transactions
Finding the right buyer for firms with a significant pipeline and backlog of federal set-aside award revenue may require additional considerations to ensure full compliance with all applicable Small Business Administration size standards and regulations.
Finding a buyer that meets these added qualifications can restrict the pool of available buyers, the conventional thinking goes, and thus burdens the selling process.
But is finding the right buyer for a set-aside firm really so difficult? A quick review of the numbers says it shouldn’t be.
If you are a women-owned small business (WOSB) you are among 9.9 million WOSB firms (Footnote 1). Service-disabled veteran-owned small business? There are 2.5 million firms that could claim that status in the U.S. today.
And most of these firms can be eligible buyers of a firm that is active in the federal set-aside market. This suggests that the available pool of eligible buyers is anything but limited.
Your knowledge of and revenue in a federal small business category is in fact a blessing and can bring the right buyer to your door.
It’s worth investing the time to understand the advisors (banks, M&A firms, law firms) that specialize in set-asides and other unique market sectors. It’s also worth attending the conferences and trade shows where these firms are speakers, sponsors, and exhibitors. They are there to help you find the right buyer.
SBA’s HUBZone program (around 5,700 firms registered in SAM (Footnote 2)) and 8(a) Business Development program (around 5,600 registered firms (Footnote 2)) represent much smaller available pools of qualified buyers, which will narrow your search. But the same rules apply: Invest the time to know the pool of available buyers and remember that all the data on these firms is free and available on SAM.gov.
Make sure to study and get solid advice regarding the impact of affiliation rules and SBA set-aside policy language. This dictates how and when revenue of two merged firms is counted against the SBA size standards. One plus one does not always equal two. The rules for combining revenue and/or headcount–past and current–that counts towards the five-year averages and totals need to be evaluated carefully to understand if the transaction will result in the right buyer.
The guidance you need is out there. You just need to find it.
Ensuring Contract Continuity
In most set-aside transactions, the right buyer is a company or an individual that can fully qualify to recertify under the categories of the acquired contracts. But what if the right buyer doesn’t qualify for your set-asides?
A buyer typically does not lose the sellers’ contracts even if the after-acquisition entity no longer qualifies for the set-aside. But in most cases, the buyer will not be able to recompete for new awards within that category.
A thorough review of existing revenue streams along with the qualifications of the potential buyer is the key determinant of the value of the current pipeline and backlog, and often requires the insight of a skilled financial team to ensure you get the benefit of all the revenue you are selling.
Conclusion
Finding the right buyer for a set-aside small business is a combination of good homework on your part and good advice from a professional with a demonstrated track record in small business transactions.
Footnotes:
(1) Source: SBA Office of Advocacy, “Small Business Facts: Spotlight on Women-Owned Employer Businesses
(2) Source: https://sam.gov
You can contact the authors at www.sbliftoff.com with any questions about your dreams and desire to lift off to your future!.
