In today’s world, social media are littered with get-rich-quick “opportunities”. They mostly involve drop-shipping or other ways to make money in the fastest way possible. This perfectly reconciles with the two soon dominating generations, Millennials and Gen Z, which seem to have lost the ability to endure along with the concept of patience. The famous quote “Rome wasn’t built in a day” doesn’t seem to resonate with them as well as it did for Boomers.
As history teaches, with the exception of situations of extreme luck, there doesn’t seem to be a clear and easy path to quick wealth creation. For the greater majority of these “online opportunities” the recipient is not the beneficiary, but the product. Wealth creation has always been a function of some sort of a real, tangible “value-add” created for society in the form of a product or a service. Furthermore, the building of a product or a service that create value in people’s lives has always been the back-bone of entrepreneurship.
While we, Millennials and Gen Z, are busy chasing the last trends on the Gram or scrambling for the last “web-ticket” to Eldorado, there seem to be a tiny substratum of individuals out there that have put their eyes on cashflow generating family-owned small businesses that are looking for someone to take them over. Now, let’s be in tune with our time and our X Folks & Friends and call them “SMB”.
SMBs are usually small, $2M to $20M in revenue, family-owned businesses that tend to operate in the blue-collar world. These entities, which come in the form of commercial cleaning businesses, flooring contractors, HVAC installers, sign manufacturers and many others, employ almost half (46%) of America's private sector workforce and represent more than 40% of gross domestic product.
Since the majority of the private equity firms out there tend to focus on much larger, better-established organizations, the lack of buyers combined with the greater risks associated with these smaller entities mostly related to their size, lack of systems and infrastructures and ultimately and most importantly, key man risk, has made SMBs somewhat hard to sell. For these reasons, exit multiples have been historically low generally ranging from 2.5x to 5x the EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) or other similar metrics of profitability such SDE, Net Income or Free Cash Flow.
Low multiples have recently made these assets attractive to smaller private equity funds as well as young professionals, mostly Millennials with a sprinkle of Gen Z, who were seeking new and cheaper ways to wealth creation.
The combination of low multiples, potentially higher returns and lower capital needs have recently generated many success stories creating a brand-new trend in the business world.
Besides the reasons mentioned above, what does make these smaller organizations attractive? In most cases, it’s the presence of multiple “low hanging fruits” that once addressed can help a business boost their profitability, its ability to compete and ultimately their scalability. Most times, these organizations have already been successful in presenting a solid track-record of profitability; nevertheless, they come with many operational inefficiencies that may only require a quick fix or the adoption of more modern infrastructure and systems. Trust me there’s plenty out there.
Generally, these inefficiencies are the result of a company’s leader being heavily involved in the day-to-day operations, which prevents them to be in tune with more modern business practices, but also to look at their business from an external POV, which would enable them to implement the necessary tweaks. Furthermore, when a company is generating cash and positive income the necessity to improve is much lower.
Another aspect to consider with regards to this lack of urgency can also be linked to the modern concept of “work-life balance”. Generally, when a business breaks through the $5M/$10M revenue ceiling operators are able to combine success with a decent lifestyle. They can take home a substantial income while being able to spend time with their family, see their kids growing.
Ultimately, personal guarantee represents another significant burden in a business owner’s mind. Growing a company to the next stage can mean higher personal liability, which can put a family’s lifestyle and security in jeopardy. As we can see, the SMB World is very intricate and complex, with trends and dynamics that are more relatable to anthropology than finance.
By 2030, all boomers will be at retirement age, which means that the market may be flooded with the last wave of opportunities. Will the Millennials and Gen Z be able and courageous enough to pick up the slack?
