Buying and Selling Small Business

Patrick Gross, MGT 386, December 10, 2008

I have grown up around parents and grandparents who have run a family business for my entire life. For 58 years my family has been in the business of the distribution and manufacturing of hydraulics and pneumatics. For the past thirty years my father has been the owner and driving force behind what is now called The RG Group. For the 22 years I have been around that business I have seen him grow the business through acquisition of smaller entities similar to the RG Group. I spent this past summer in Pennsylvania working there for the first time and saw what he did on a day to day basis to search for new acquisitions.

I found that there are some tough things about buying and selling a small business. The toughest thing is not finding them because people are always looking to cash out. I think the biggest thing is finding a place to meet on price. A lot of small business owners have worked their whole lives to make an organization worthwhile and when someone comes along trying to make a deal assumptions about value don’t always seem to meet at the same place. The standard is to usually take EBITDA and multiply it by 4 and that’s what you should be paying. In other words multiply the earnings of this business to find the true value.

For a small distributor like our family owns the only way to grow is through acquisition. There could be a need in that market to help business advertise or better value small businesses. I know that for our business it is the job of the senior leadership to seek out new opportunities for expansion. When they do identify one my father comes in and decides if it is a worthwhile investment and either pursues or he doesn’t. When he does find a worthwhile investment it immediately pays returns due to the fact that he does not have to keep the companies leadership on staff. He really is just paying for their customer base. What he buys is more people to sell his products.

Recently we had a former accountant and new franchisee of B2B CFO come to our Business Honors Class to speak. This was an interesting concept for me to observe due to my previous exposure to a small business merger and acquisition. B2B CFO is a company that seeks out former accountants to become franchisees. These franchisees then develop a client book of small business owners and help them grow through acquisition. The franchisees do also help their clients to better manage their finances. From what I understand this is a good way for small business to look for quality acquisitions due to the fact that the B2B CFO is financially literate and can help “Joe the Plumber” value a business accordingly.

I have also recently heard of some e-commerce sites that are attempting to fill the market need of having a so called small business exchange. My opinion is that this will not be successful. I think this because I have seen the personal relationships my father has had to develop in the past to complete these mergers and acquisitions. It takes a lot of wining and dining to convince someone to sell their life’s work at a reasonable price. The social network or e-commerce site would only be good for introducing the opportunity to the small business owner.

References:

1. www.B2BCFO.com
2. www.rg-group.com
3. http://www.practicalecommerce.com/articles/451-Selling-Your-Ecommerce-Business
4. www.Businessforsale.com