Why Doing Smaller Deals Can Be More Difficult

Most business brokers end up doing small deals at one time or another. After all, in most industries there are more small companies than medium or large companies. In my business, I consider a small deal one where the purchase price is less than $250,000. I have done 4 myself in the last 6 months.

Selling a small that size is not likely to set the owner up for life. In most cases it just time to sell the business for whatever reason. Despite the fact that the business and deal size is small, the owners are just as proud of their business and almost all of them want to see their customers put in good hands after. So as a broker I have learned you have to treat this size of deal with as much care as the bigger deals.

There is some truth in the saying that small deals can take as much as big deals. After all you have to go through the same sales process on both- creating the Selling Package for buyers to see, searching for potential buyers, picking the best offer from those buyers, getting a Letter of Intent signed with the best offer and then going through due diligence to get the deal closed. All of this takes time even with a small deal. To support this point I don’t remember closing any deal is less than 3 months- large or small.

From experience I have found there are some particular aspects to doing small deals:

• It is often more difficult and takes more time to get all the info you need to sell a small company. Many times, the owner does not have the staff available to pull this info out. On several occasions I have had to use a computer sub-contractor to fill in the Acquisition Spreadsheet on a seller’s monitored account base.
• Owners of small businesses are sometimes not quite as computer literate as in bigger companies. They do know their security business though.
• Smaller companies often don’t have their accounts set up with the best and latest equipment and on signed contracts. This can affect the price.
• Owners of small business many times don’t know the process of how businesses are typically sold and are therefore not aware of some of the standard terms and deductions they are likely to encounter in their Purchase and Sale agreement.

Despite these issues, I have a tough time turning down any deal despite the fact that small deals are often not a great money maker. I often take the deal because the seller does need help selling and there does not appear to be anyone else that can help them.

Despite the issues surrounding small deals I believe that with some thought, we can speed up the process of completing small deals

When I worked for Protectron many years ago, they developed a slimmed- down process to do smaller deals. They narrowed down the range of multiples offered on small deals to anywhere from 24 to 30 X RMR. Most sellers were ok with this. The Protectron Letter of Intent for smaller deals was much shorter. Virtually all Protectron small deals were “asset “deals, not more time consuming “share” deals. Due diligence was not as extensive and neither was the final Asset Purchase Agreement. This slimmed down process worked. In the alarm account market today, the only buyer that I have worked with that has a process something like Protectron’s is API Alarms.

On the Seller’s side, there are some things that a Seller can do to speed up the process:

• Current financials prepared - Despite the Seller selling assets the buyer often will want to see financials
• Clean separation between personal and business expenses- Indicate how much you as an Owner was paid in salary, bonus or expenses.
• Up-to-date, signed customer contracts, especially for recurring services like monitoring
• Documented service history
• If the Seller wants to sell inventory and vehicles in the deal, they must have good details on both ready.
• A snapshot of your customer base with key metrics: retention, billing cycles, RMR, and payment history

If you are a seller and looking at a smaller deal, here are some other to note:

• Just because you are selling is a small business, this doesn’t mean you can do it on your own. In some ways a broker can be of more use to the owner of a small business than a large one.
• It is unlikely (but not impossible) that you will be able to sell the shares of your company. Asset deals are easier and quicker to do.
• If you use a broker, their Success Fee will be a higher % of the final purchase price simply because the deal size is so much smaller.
• Sometimes it is difficult to find buyers for smaller deals. Small deals are often too expensive for big buyer to get involved with. Your buyer will most likely be small player in your area.
• Prices or multiples are not as high for small deals as with bigger deals so don’t go looking for 36X RMR or 6X EBITDA on your small deal.
• If you don’t want to take a financial holdback at all then expect the final price to drop a little.
• Always check the buyer out before selling. A bad buyer who does not take care of your business can be way more trouble than it is worth.
• As with all deals the integration of your business into the buyer’s business is absolutely critical to the success of the deal. Pay attention to that part of the process.
• Finally, the golden rule that I tell all sellers is that selling your business takes time- more time than most sellers think.

Small deals are here to stay. They deserve our attention as much as large deals. Besides the fees earned and the satisfaction in helping an owner sell their business there has never been a deal done where I did not learn something new.

Victor Harding

Harding Security Services Inc

victor@hardingsecurity.ca